1933 Act Registration No. 033-16905
1940 Act Registration No. 811-05309
As filed with the Securities and Exchange Commission on August 31, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ x ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 80 [ x ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 80 [ x ]
FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of Principal Executive Offices) (Zip Code)
(612) 303-7987
(Registrant's Telephone Number, including Area Code)
Richard J. Ertel
U.S. Bancorp Center
800 Nicollet Mall, BC-MN-H05F
Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[ ] on (date) pursuant to paragraph (b) of Rule 485.
[ x ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
(FIRST AMERICAN FUNDS LOGO)
October 30, 2006
Prospectus
First American Investment Funds, Inc.
ASSET CLASS - BOND FUNDS
INCOME FUNDS
CLASS A, CLASS B, CLASS C, CLASS R AND
CLASS Y SHARES
CORE BOND FUND
HIGH INCOME BOND FUND
INFLATION PROTECTED SECURITIES FUND
INTERMEDIATE GOVERNMENT BOND FUND
INTERMEDIATE TERM BOND FUND
SHORT TERM BOND FUND
TOTAL RETURN BOND FUND
U.S. GOVERNMENT MORTGAGE FUND
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the shares
of these funds, or determined if the
information in this prospectus is
accurate or complete. Any statement to
the contrary is a criminal offense.
TABLE OF
CONTENTS
FUND SUMMARIES
Core Bond Fund 2
High Income Bond Fund 4
Inflation Protected Securities Fund 6
Intermediate Government Bond Fund 9
Intermediate Term Bond Fund 11
Short Term Bond Fund 13
Total Return Bond Fund 15
U.S. Government Mortgage Fund 17
MORE ABOUT THE FUNDS
Investment Strategies, Risks and Other Investment
Matters 22
POLICIES AND SERVICES
Purchasing, Redeeming, and Exchanging Shares 26
Managing Your Investment 39
ADDITIONAL INFORMATION
Management 41
Financial Highlights 43
FOR MORE INFORMATION Back Cover
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Fund Summaries
Introduction
This section of the prospectus describes the objectives of the First American Income Funds, summarizes the principal investment strategies used by each fund in trying to achieve its objective, and highlights the risks involved with these strategies. It also provides you with information about the performance, fees, and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS PROSPECTUS AND THE RELATED STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES IN THE FUNDS, NOR SHALL ANY SUCH SHARES BE OFFERED OR SOLD TO ANY PERSON IN ANY JURISDICTION IN WHICH AN OFFER, SOLICITATION, PURCHASE, OR SALE WOULD BE UNLAWFUL UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
PROSPECTUS - First American Income Funds
Fund Summaries
Core Bond Fund
OBJECTIVE
Core Bond Fund's objective is to provide investors with high current income consistent with limited risk to capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Core Bond Fund invests in investment grade debt securities, such as:
- U.S. government securities (securities issued or guaranteed by the U.S. government or its agencies or instrumentalities), including zero coupon securities.
- residential and commercial mortgage-backed securities.
- asset-backed securities.
- corporate debt obligations, including obligations issued by special-purpose entities that are backed by corporate debt obligations.
Fund managers select securities using a "top-down" approach, which begins with the formulation of their general economic outlook. Following this, various sectors and industries are analyzed and selected for investment. Finally, fund managers select individual securities within these sectors or industries.
Debt securities in the fund will be rated investment grade at the time of purchase or, if unrated, determined to be of comparable quality by the fund's advisor. If the rating of a security is reduced or the credit quality of an unrated security declines after purchase, the fund is not required to sell the security, but may consider doing so. At least 65% of the fund's debt securities must be either U.S. government securities or securities that have received at least an A or equivalent rating. Unrated securities will not exceed 25% of the fund's total assets.
The fund may invest up to 25% of its total assets in dollar denominated debt obligations of foreign corporations and governments.
Under normal market conditions the fund attempts to maintain a weighted average effective maturity for its portfolio securities of 15 years or less and an average effective duration of three to eight years. The fund's weighted average effective maturity and average effective duration are measures of how the fund may react to interest rate changes.
To generate additional income, the fund may invest up to 25% of total assets in dollar roll transactions. In a dollar roll transaction, the fund sells mortgage-backed securities for delivery in the current month while contracting with the same party to repurchase similar securities at a future date.
The fund may utilize derivatives such as options, futures contracts, options on futures contracts, interest rate caps and floors, interest rate, total return and credit default swap agreements, and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Dollar Roll Transaction Risk
- Foreign Security Risk
- Income Risk
- Interest Rate Risk
- Mortgage- and Asset-Backed Securities Risk
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Core Bond Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class B and Class C shares will be lower due to their higher expenses. The performance of Class R and Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class B, Class C, Class R, and Class Y shares, the table only includes returns before taxes. After-tax returns for Class B, Class C, Class R, and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1)
(BAR CHART)
3.20% 8.47% 8.67% (3.00)% 10.79% 7.84% 8.04% 3.95% 3.53% 2.08% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2001 4.69% Worst Quarter: Quarter ended June 30, 2004 (2.54)% |
Since Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception Inception
AS OF 12/31/05 Date One Year Five Years Ten Years (Class C) (Class R)
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Core Bond Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 12/22/87 (2.25)% 4.16% 4.82% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on
distributions) (3.77)% 2.42% 2.76% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on
distributions and sale of fund shares) (1.47)% 2.52% 2.83% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class B (return before taxes) 8/15/94 (3.55)% 3.93% 4.51% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/99 0.42% 4.28% N/A 3.95% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class R (return before taxes) 9/24/01 1.83% N/A N/A N/A 4.02%
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/4/94 2.34% 5.32% 5.55% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Lehman Aggregate Bond Index(2)
(reflects no deduction for fees, expenses,
or taxes) 2.43% 5.87% 6.17% % %
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(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged fixed income index covering the U.S. investment grade fixed-rate bond market.
PROSPECTUS - First American Income Funds
Fund Summaries
High Income Bond Fund
OBJECTIVE
High Income Bond Fund's objective is to provide investors with a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, High Income Bond Fund will invest primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in securities rated lower than investment grade at the time of purchase or in unrated securities of comparable quality (securities commonly referred to as "high-yield" securities or "junk bonds"). These securities generally provide high income in an effort to compensate investors for their higher risk of default, which is the failure to make required interest or principal payments. High-yield bond issuers include small or relatively new companies lacking the history or capital to merit investment-grade status, former blue chip companies downgraded because of financial problems, companies electing to borrow heavily to finance or avoid a takeover or buyout, and firms with heavy debt loads. Fund managers employ a bottom up approach to investing. They devote more resources to evaluating individual securities rather than assessing macro-economic trends. Securities are selected using fundamental credit research to identify relative value in the market. Positions are sold in anticipation of credit deterioration or when a security is priced expensively relative to other comparable investments.
There is no minimum rating requirement and no limitation on the average maturity or average effective duration of securities held by the fund.
The fund may invest up to 25% of its total assets in dollar denominated debt obligations of foreign corporations and governments. Up to 20% of the fund's total assets may be invested in debt obligations issued by governmental and corporate issuers that are located in emerging market countries. A country is considered to have an "emerging market" if it has a relatively low gross national product per capita compared to the world's major economies, and the potential for rapid economic growth, provided that no issuer included in the fund's current benchmark index will be considered to be located in an emerging market country.
The fund may utilize derivatives such as options, futures contracts, options on futures contracts, interest rate caps and floors, interest rate, total return and credit default swap agreements, and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Emerging Markets Risk
- Foreign Security Risk
- High-Yield Securities Risk
- Income Risk
- Interest Rate Risk
- Liquidity Risk
See "More About the Funds" for a discussion of these risks.
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class B and Class C shares will be lower due to their higher expenses. The performance of Class R and Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class B, Class C, Class R, and Class Y shares, the table only includes returns before taxes. After-tax returns for Class B, Class C, Class R, and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax- deferred arrangements, such as 401(k) plans or individual retirement accounts.
PROSPECTUS - First American Income Funds
Fund Summaries
High Income Bond Fund CONTINUED
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1,2)
(BAR CHART)
(1.22)% 24.03% 10.30% 2.89% 2002 2003 2004 2005 Best Quarter: Quarter ended June 30, 2003 9.36% Worst Quarter: Quarter ended September 30, 2002 (4.90)% |
Since
Inception
(Class A,
Class B, Since
AVERAGE ANNUAL TOTAL RETURNS Inception Class C Inception
AS OF 12/31/05(2) Date One Year and Class Y) (Class R)
-----------------------------------------------------------------------------------------------------------------------
High Income Bond Fund
-----------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 8/30/01 (1.46)% 5.41% N/A
-----------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (3.81)% 2.53% N/A
-----------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale of
fund shares) (0.98)% 2.82% N/A
-----------------------------------------------------------------------------------------------------------------------
Class B (return before taxes) 8/30/01 (2.67)% 5.39% N/A
-----------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 8/30/01 (1.16)% 5.69% N/A
-----------------------------------------------------------------------------------------------------------------------
Class R (return before taxes) 9/24/01 2.43% N/A 7.64%
-----------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 8/30/01 3.05% 6.74% N/A
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Lehman Corporate High Yield 2% Issuer Capped Index(3)
(reflects no deduction for fees, expenses, or taxes) 2.76% 8.91% 10.89%
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(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 3/13/03 represents that of First American High Yield Bond Fund, which merged into the fund on that date.
(3)An unmanaged index that covers the universe of fixed-rate, dollar-denominated, below-investment-grade debt with at least one year to final maturity with total index allocation to an individual issuer being limited to 2%. The since inception performance of the index is calculated from 8/31/01 for Class A, Class B, Class C, and Class Y shares, and from 9/30/01 for Class R shares.
PROSPECTUS - First American Income Funds
Fund Summaries
Inflation Protected Securities Fund
OBJECTIVE
Inflation Protected Securities Fund seeks to provide investors with total return while providing protection against inflation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Inflation Protected Securities Fund will invest primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in inflation protected debt securities. These securities will be issued by the U.S. and non-U.S. governments, their agencies and instrumentalities, and domestic and foreign corporations. The fund's investments in U.S. Government inflation protected securities will include U.S. Treasury inflation-protection securities as well as inflation protected securities issued by agencies and instrumentalities of the U.S. Government. Securities issued by the U.S. Treasury are backed by the full faith and credit of the U.S. Government. Some securities issued by agencies and instrumentalities of the U.S. Government are supported only by the credit of the issuing agency or instrumentality.
Inflation protected debt securities are designed to provide protection against the negative effects of inflation. Unlike traditional debt securities, which pay regular fixed interest payments on a fixed principal amount, interest payments on inflation protected debt securities will vary with the rate of inflation. The U.S. Treasury uses the Consumer Price Index for Urban Consumers (CPI-U) as the inflation measure. Inflation protected bonds issued by foreign governments and corporations are generally linked to a non-U.S. inflation rate.
Inflation protected debt securities have two common structures. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. If the index measuring the rate of inflation rises, the principal value of the security will increase. Because interest payments will be calculated with respect to a larger principal amount, interest payments also will increase. Conversely, if the index measuring the rate of inflation falls, the principal value of the security will fall and interest payments will decrease. Other issuers adjust the interest rates payable on the security according to the rate of inflation, but the principal amount remains the same.
In the event of sustained deflation, the U.S. Treasury has guaranteed that it will repay at maturity at least the original face value of the inflation protected securities that it issues. Other inflation protected debt securities that accrue inflation into their principal value may or may not provide a similar guarantee. For securities that do not provide such a guarantee, the adjusted principal value of the security repaid at maturity may be less than the original principal value.
Up to 20% of the Fund's assets may be invested in holdings that are not inflation protected. These holdings may include the following:
- domestic and foreign corporate debt obligations.
- securities issued or guaranteed by the U.S. government or its agencies and instrumentalities.
- debt obligations of foreign governments.
- residential and commercial mortgage-backed securities.
- asset-backed securities.
- derivative instruments, as discussed below.
When selecting securities for the fund, the portfolio managers use a "top-down" approach, looking first at general economic factors and market conditions. The managers then select securities that they believe have strong relative value based on an analysis of a security's characteristics (such as principal value, coupon rate, maturity, duration and yield) in light of these general economic factors and market conditions. The managers will sell securities if the securities no longer meet these criteria, if other investments appear to be a better relative value, to manage the duration of the fund, or to meet redemption requests.
The fund invests primarily in securities rated investment grade at the time of purchase by a nationally recognized statistical rating organization or in unrated securities of comparable quality. However, up to 10% of the fund's net assets may be invested in securities that are rated lower than investment grade at the time of purchase or that are unrated and of comparable quality (securities commonly referred to as "high-yield" securities or "junk bonds"). The fund will not invest in securities rated lower than B at the time of purchase or in unrated securities of equivalent quality. Quality determinations regarding unrated securities will be made by the fund's advisor.
The fund may invest up to 20% of its net assets in non-dollar denominated securities, and may invest without limitation in U.S. dollar denominated securities of foreign corporations and governments.
The fund may invest in debt securities of any maturity, but expects to maintain, under normal market conditions, a weighted average effective maturity of between 8 and 15 years and an average effective duration of between 4 and 10 years. The fund's weighted average effective maturity and average effective duration are measures of how the fund may react to interest rate changes.
PROSPECTUS - First American Income Funds
Fund Summaries
Inflation Protected Securities Fund CONTINUED
The fund may utilize the following derivatives: options; futures contracts; options on futures contracts; foreign currency contracts; options on foreign currencies; interest rate caps and floors; index- and other asset-linked notes; swap agreements, including swap agreements on interest rates, currency rates, security indexes and specific securities, and credit default swap agreements; and options on the foregoing types of swap agreements. The fund may also invest in commodity-linked derivative instruments, including swap agreements on commodity indexes or specific commodities; commodity options, futures and options on futures; and commodity-linked notes. The fund may enter into standardized derivatives contracts traded on domestic or foreign securities exchanges, boards of trade, or similar entities, and non-standardized derivatives contracts traded in the over-the-counter ("OTC") market. The fund may use these derivatives in an attempt to manage market risk, currency risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates, inflation and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Foreign Security Risk
- High-Yield Securities Risk
- Income Risk
- Indexing Methodology Risk
- Interest Rate Risk
- International Investing Risk
- Liquidity Risk
- Mortgage- and Asset-Backed Securities Risk
- Tax Consequences of Inflation Adjustments
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Inflation Protected Securities Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart is intended to show you how performance of the fund's Class A shares has varied from year to year. However, because the fund was first offered in 2004, only one calendar year of performance information is available. The performance of Class C shares will be lower due to their higher expenses. The performance of Class R and Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C, Class R, and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C, Class R, and Class Y shares will vary. After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1)
(BAR CHART)
2.19% 2005 Best Quarter: Quarter ended June 30, 2005 2.98% Worst Quarter: Quarter ended March 31, 2005 (0.53)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Inception ----------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund ----------------------------------------------------------------------------------------------------- Class A (return before taxes) 10/1/04 (2.14)% 0.38% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (3.95)% (1.37)% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) (1.40)% (0.68)% ----------------------------------------------------------------------------------------------------- Class C (return before taxes) 10/1/04 0.49% 2.37% ----------------------------------------------------------------------------------------------------- Class R (return before taxes) 10/1/04 2.12% 3.78% ----------------------------------------------------------------------------------------------------- Class Y (return before taxes) 10/1/04 2.44% 4.20% ----------------------------------------------------------------------------------------------------- Lehman TIPs Index(2) (reflects no deduction for fees, expenses, or taxes) 2.84% 4.32% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index consisting of inflation-protected securities issued by the U.S. Treasury that have at least one year to final maturity.
PROSPECTUS - First American Income Funds
Fund Summaries
Intermediate Government Bond Fund
OBJECTIVE
Intermediate Government Bond Fund's objective is to provide investors with current income that is exempt from state income tax, to the extent consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Government Bond Fund invests substantially all of its assets in U.S. government securities that pay interest that is generally exempt from state income tax. U.S. government securities are securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. U.S. government securities that pay interest exempt from state income tax include U.S. Treasury obligations and obligations issued by certain U.S. government agencies or instrumentalities, including, but not limited to, the following:
- Federal Farm Credit Banks.
- Federal Home Loan Banks System.
- Tennessee Valley Authority.
Securities issued by the U.S. Treasury are backed by the full faith and credit of the U.S. Government. Some securities issued by agencies and instrumentalities of the U.S. Government are supported only by the credit of the issuing agency or instrumentality.
In selecting securities for the fund, fund managers first determine their economic outlook and the direction in which inflation and interest rates are expected to move. In selecting individual securities consistent with this outlook, fund managers evaluate factors such as credit quality, yield, maturity, liquidity, and portfolio and geographical diversification.
Under normal market conditions, the fund attempts to maintain a weighted average effective maturity between 3 and 10 years and an effective duration between 2.5 and 7 years. The fund's weighted average effective maturity and effective duration are measures of how the fund may react to interest rate changes.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Income Risk
- Interest Rate Risk
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Intermediate Government Bond Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1)
(BAR CHART)
1.55% 1.48% 1.63% 2003 2004 2005 Best Quarter: Quarter ended June 30, 2005 2.98% Worst Quarter: Quarter ended June 30, 2004 (2.41)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Inception ---------------------------------------------------------------------------------------------- Intermediate Government Bond Fund ---------------------------------------------------------------------------------------------- Class A (return before taxes) 10/25/02 (0.63)% 1.27% ---------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.96)% (0.78)% ---------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) (0.36)% 0.25% ---------------------------------------------------------------------------------------------- Class Y (return before taxes) 10/25/02 1.78% 2.14% ---------------------------------------------------------------------------------------------- Lehman Intermediate Treasury Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 1.56% 2.09% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of public obligations of the U.S. Treasury with a remaining maturity between one and ten years. The since inception performance of the index is calculated from 10/31/02.
PROSPECTUS - First American Income Funds
Fund Summaries
Intermediate Term Bond Fund
OBJECTIVE
Intermediate Term Bond Fund's objective is to provide investors with current income to the extent consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Intermediate Term Bond Fund invests primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in debt securities, such as:
- U.S. government securities, (securities issued or guaranteed by the U.S. government or its agencies or instrumentalities), including zero coupon securities.
- residential and commercial mortgage-backed securities.
- asset-backed securities.
- corporate debt obligations, including obligations issued by special-purpose entities that are backed by corporate debt obligations.
Debt securities in the fund will be rated investment grade at the time of purchase or, if unrated, determined to be of comparable quality by the fund's advisor. If the rating of a security is reduced or discontinued after purchase, the fund is not required to sell the security, but may consider doing so. At least 65% of the fund's debt securities must be either U.S. government securities or securities that have received at least an A or equivalent rating. Unrated securities will not exceed 25% of the fund's total assets.
Fund managers select securities using a "top-down" approach, which begins with the formulation of their general economic outlook. Following this, various sectors and industries are analyzed and selected for investment. Finally, fund managers select individual securities within these sectors or industries.
The fund may invest up to 25% of its total assets in dollar denominated debt obligations of foreign corporations and governments.
Under normal market conditions the fund attempts to maintain a weighted average effective maturity for its portfolio securities of three to ten years and an average effective duration of two to six years. The fund's weighted average effective maturity and effective duration are measures of how the fund may react to interest rate changes.
To generate additional income, the fund may invest up to 25% of total assets in dollar roll transactions. In a dollar roll transaction, the fund sells mortgage-backed securities for delivery in the current month while contracting with the same party to repurchase similar securities at a future date.
The fund may utilize derivatives such as options, futures contracts, options on futures contracts, interest rate caps and floors, interest rate, total return and credit default swap agreements, and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Dollar Roll Transaction Risk
- Foreign Security Risk
- Income Risk
- Interest Rate Risk
- Mortgage- and Asset-Backed Securities Risk
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Intermediate Term Bond Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class Y shares has varied from year to year. The performance of Class A shares will be lower due to their higher expenses.
The table compares the performance for each share class of the fund over different time periods, to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table only includes returns before taxes. For Class Y shares, the table includes returns both before and after taxes. After-tax returns for Class A shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class Y)(1,2)
(BAR CHART)
4.06% 7.34% 7.91% 1.00% 10.18% 7.71% 8.08% 4.07% 2.83% 1.64% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2001 4.18% Worst Quarter: Quarter ended June 30, 2004 (2.43)% |
AVERAGE ANNUAL TOTAL RETURNS Inception AS OF 12/31/05(2) Date One Year Five Years Ten Years ---------------------------------------------------------------------------------------------------------------------- Intermediate Term Bond Fund ---------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 1/9/95 (0.77)% 4.19% 4.99% ---------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 1/5/93 1.64% 4.84% 5.44% ---------------------------------------------------------------------------------------------------------------------- Class Y (return after taxes on distributions) 0.22% 3.12% 3.36% ---------------------------------------------------------------------------------------------------------------------- Class Y (return after taxes on distributions and sale of fund shares) 1.06% 3.13% 3.36% ---------------------------------------------------------------------------------------------------------------------- Lehman Intermediate Gov't/Credit Bond Index(3) (reflects no deduction for fees, expenses, or taxes) 1.58% 5.50% 5.80% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 9/24/01 represents that of the Firstar Intermediate Bond Fund, a series of Firstar Funds, Inc., which merged into the fund on that date.
(3)An unmanaged index of investment grade, fixed income securities with maturities ranging from one to ten years.
PROSPECTUS - First American Income Funds
Fund Summaries
Short Term Bond Fund
OBJECTIVE
Short Term Bond Fund's objective is to provide investors with current income while maintaining a high degree of principal stability.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Short Term Bond Fund invests primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in debt securities, such as:
- residential and commercial mortgage-backed securities.
- asset-backed securities.
- corporate debt obligations, including obligations issued by special-purpose entities that are backed by corporate debt obligations.
- U.S. government securities, which are securities issued or guaranteed by the U.S. government or its agencies or instrumentalities.
- commercial paper.
Debt securities in the fund will be rated investment grade at the time of purchase or, if unrated, determined to be of comparable quality by the fund's advisor. If the rating of a security is reduced or discontinued after purchase, the fund is not required to sell the security, but may consider doing so. At least 65% of the fund's debt securities must be either U.S. government securities or securities that have received at least an A or equivalent rating. Unrated securities will not exceed 25% of the fund's total assets.
Fund managers select securities using a "top-down" approach, which begins with the formulation of their general economic outlook. Following this, various sectors and industries are analyzed and selected for investment. Finally, fund managers select individual securities within these sectors or industries.
The fund may invest up to 25% of its total assets in dollar denominated debt obligations of foreign corporations and governments.
Under normal market conditions the fund attempts to maintain a weighted average effective maturity and an average effective duration for its portfolio securities of one to three years. The fund's weighted average effective maturity and effective duration are measures of how the fund may react to interest rate changes.
The fund may utilize derivatives such as options, futures contracts, options on futures contracts, interest rate caps and floors, interest rate, total return and credit default swap agreements, and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Foreign Security Risk
- Income Risk
- Interest Rate Risk
- Mortgage- and Asset-Backed Securities Risk
See "More About the Fund" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Short Term Bond Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1)
(BAR CHART)
5.60% 5.93% 6.08% 3.34% 8.17% 7.15% 6.00% 1.85% 0.96% 1.43% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2001 3.15% Worst Quarter: Quarter ended June 30, 2004 (1.24)% |
AVERAGE ANNUAL TOTAL RETURNS Inception AS OF 12/31/05 Date One Year Five Years Ten Years ---------------------------------------------------------------------------------------------------------------------- Short Term Bond Fund ---------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 12/14/92 (0.83)% 2.98% 4.38% ---------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.96)% 1.62% 2.55% ---------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) (0.55)% 1.72% 2.59% ---------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/4/94 1.59% 3.60% 4.71% ---------------------------------------------------------------------------------------------------------------------- Lehman 1-3 Year Gov't/Credit Index(2) (reflects no deduction for fees, expenses, or taxes) 1.77% 4.15% 5.07% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index of investment grade, fixed income securities with maturities ranging from one to three years.
PROSPECTUS - First American Income Funds
Fund Summaries
Total Return Bond Fund
OBJECTIVE
Total Return Bond Fund's objective is to provide investors with a high level of current income consistent with prudent risk to capital. While the fund may realize some capital appreciation, the fund primarily seeks to achieve total return through preserving capital and generating income.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, Total Return Bond Fund will invest primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in the following types of debt securities:
- U.S. government securities (securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).
- residential and commercial mortgage-backed securities.
- asset-backed securities.
- domestic and foreign corporate debt obligations, including obligations issued by special-purpose entities that are backed by corporate debt obligations.
- debt obligations of foreign governments.
Up to 30% of the fund's total assets may be invested collectively in the following categories of debt securities, provided that the fund will not invest more than 20% of its total assets in any single category:
- securities rated lower than investment grade or unrated securities of comparable quality (securities commonly referred to as "high-yield" or "junk bonds") as determined by the fund's advisor. The fund will not invest in securities rated lower than CCC at the time of purchase or in unrated securities of equivalent quality.
- non-dollar denominated debt obligations of foreign corporations and governments. (The fund may invest without limitation in U.S. dollar denominated securities of foreign issuers that are not located in emerging market countries.)
- debt obligations issued by governmental and corporate issuers that are located in emerging market countries. A country is considered to have an "emerging market" if it has a relatively low gross national product per capita compared to the world's major economies, and the potential for rapid economic growth, provided that no issuer included in the fund's current benchmark index will be considered to be located in an emerging market country.
Fund managers make buy, sell, and hold decisions using a "top-down" approach, which begins with the formulation of their general economic outlook. Following this, various sectors and industries are analyzed and selected for investment. Finally, fund managers select individual securities within these sectors or industries. Fund managers also analyze expected changes to the yield curve under multiple market conditions to help define maturity and duration selection.
The fund invests primarily in securities rated investment grade at the time of purchase by a nationally recognized statistical rating organization or in unrated securities of comparable quality. As noted above, however, up to 20% of the fund's total assets may be invested in securities that are rated lower than investment grade at the time of purchase or that are unrated and of comparable quality. Quality determinations regarding unrated securities will be made by the fund's advisor. Unrated securities will not exceed 25% of the fund's total assets.
To generate additional income, the fund may invest up to 25% of total assets in dollar roll transactions. In a dollar roll transaction, the fund sells mortgage-backed securities for delivery in the current month while contracting with the same party to repurchase similar securities at a future date.
Under normal market conditions the fund attempts to maintain a weighted average effective maturity for its portfolio securities of 15 years or less and an average effective duration of three to eight years. The fund's weighted average effective maturity and average effective duration are measures of how the fund may react to interest rate changes.
The fund may utilize the following derivatives: options; futures contracts; options on futures contracts; interest rate caps and floors; foreign currency contracts; options on foreign currencies; interest rate, total return and credit default swap agreements; and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, currency risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The fund may also use derivatives to gain exposure to non-dollar denominated securities markets to the extent it does not do so through direct investments. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
- The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Call Risk
- Credit Risk
- Derivative Instrument Risk
- Dollar Roll Transaction Risk
- Emerging Markets Risk
- Foreign Security Risk
- High-Yield Securities Risk
- Income Risk
- Interest Rate Risk
- International Risk
- Liquidity Risk
- Mortgage- and Asset-Backed Securities Risk
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
Total Return Bond Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class B and Class C shares will be lower due to their higher expenses. The performance of Class R and Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class B, Class C, Class R, and Class Y shares, the table only includes returns before taxes. After-tax returns for Class B, Class C, Class R, and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
Effective May 13, 2005, the fund's name was changed from Corporate Bond Fund to Total Return Bond Fund, and the fund's principal investment strategy was changed from investing primarily in corporate debt obligations to investing primarily in the types of debt securities listed above. As a result, the performance information provided below for periods prior to May 13, 2005 reflects the performance of an investment portfolio that is materially different from the fund's current investment portfolio.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1)
(BAR CHART)
7.14% 5.62% 9.77% 5.54% 2.37% 2001 2002 2003 2004 2005 Best Quarter: Quarter ended June 30, 2003 6.43% Worst Quarter: Quarter ended June 30, 2004 (3.60)% |
Since
Inception
(Class A,
Class B, Since
AVERAGE ANNUAL TOTAL RETURNS Inception Class C, Inception
AS OF 12/31/05 Date One Year Five Years and Class Y) (Class R)
---------------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/1/00 (2.00)% 5.14% 5.81% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (3.40)% 2.88% 3.40% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and
sale of fund shares) (1.31)% 2.99% 3.46% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class B (return before taxes) 2/1/00 (3.31)% 4.90% 5.64% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/00 0.62% 5.24% 5.75% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class R (return before taxes) 9/24/01 2.18% N/A N/A 5.49%
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/1/00 2.62% 6.30% 6.82% N/A
---------------------------------------------------------------------------------------------------------------------------------
Lehman Aggregate Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 2.43% 5.87% 6.97% 4.94%
|
()(1)Total return for the period from 1/1/06 through 9/30/06 was %.
()(2)An unmanaged fixed income index covering the U.S. investment grade fixed-rate bond market. The since inception performance of the index is calculated from 1/31/00 for Class A, Class B, Class C, and Class Y shares, and from 9/30/01 for Class R shares.
PROSPECTUS - First American Income Funds
Fund Summaries
U.S. Government Mortgage Fund
OBJECTIVE
U.S. Government Mortgage Fund's objective is to provide investors with high current income to the extent consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, U.S. Government Mortgage Fund invests primarily (at least 80% of its net assets, plus the amount of any borrowings for investment purposes) in mortgage-related securities issued or guaranteed by the U.S. government or its agencies or instrumentalities.
U.S. government securities are bonds or other debt obligations issued or guaranteed as to principal and interest by the U.S. government or one of its agencies or instrumentalities. U.S. Treasury securities and some obligations of U.S. government agencies and instrumentalities are supported by the "full faith and credit" of the United States government. Other U.S. government securities are backed by the right of the issuer to borrow from the U.S. Treasury. Still others are supported only by the credit of the issuer or instrumentality. Mortgage-backed securities include securities issued by U.S. government-sponsored entities such as Ginnie Mae, Fannie Mae, and Freddie Mac.
When selecting securities for the fund, the portfolio managers use a "top-down" approach, looking first at general economic factors and market conditions, then at individual securities.
Under normal market conditions, the fund attempts to maintain a weighted average effective maturity of ten years or less.
The fund may utilize derivatives such as options, futures contracts, options on futures contracts, interest rate caps and floors, interest rate, total return and credit default swap agreements, and options on the foregoing types of swap agreements. The fund may use these derivatives in an attempt to manage market risk, credit risk and yield curve risk, to manage the effective maturity or duration of securities in the fund's portfolio or for speculative purposes in an effort to increase the fund's yield or to enhance returns. The use of a derivative is speculative if the fund is primarily seeking to enhance returns, rather than offset the risk of other positions. When the fund invests in a derivative for speculative purposes, the fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative's cost. The fund may not use any derivative to gain exposure to a security or type of security that it would be prohibited by its investment restrictions from purchasing directly.
PRINCIPAL RISKS
The price and yield of this fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in this fund include:
- Active Management Risk
- Credit Risk
- Derivative Instrument Risk
- Income Risk
- Interest Rate Risk
- Mortgage- and Asset-Backed Securities Risk
See "More About the Funds" for a discussion of these risks.
PROSPECTUS - First American Income Funds
Fund Summaries
U.S. Government Mortgage Fund CONTINUED
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class B and Class C shares will be lower due to their higher expenses. The performance of Class R and Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class B, Class C, Class R, and Class Y shares, the table only includes returns before taxes. After-tax returns for Class B, Class C, Class R, and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (Class A)(1,2)
(BAR CHART)
3.01% 6.37% 6.43% 0.69% 9.49% 7.34% 8.19% 2.19% 3.23% 1.90% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2001 4.39% Worst Quarter: Quarter ended June 30, 2004 (1.18)% |
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/05(2) Date One Year Five Years Ten Years (Class C)
---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Mortgage Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 6/2/88 (2.47)% 3.63% 4.44% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (3.94)% 1.90% 2.42% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) (1.62)% 2.07% 2.52% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class B (return before taxes) 5/11/95 (3.84)% 3.23% 4.12% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 9/24/01 0.15% N/A N/A 2.80%
---------------------------------------------------------------------------------------------------------------------------------
Class R (return before taxes) 6/7/94 1.57% 4.47% 4.81% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/1/91 2.06% 4.79% 5.13% N/A
---------------------------------------------------------------------------------------------------------------------------------
Lehman Mortgage-Backed Securities Index(3)
(reflects no deduction for fees, expenses, or taxes) 2.61% 5.44% 6.17% 4.49%
|
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 9/24/01 represents that of the Firstar U.S. Government Securities Fund, a series of Firstar Funds, Inc., which merged into the fund on that date. The Firstar U.S. Government Securities Fund was organized on 11/27/00 and, prior to that, was a separate series of Mercantile Mutual Funds, Inc.
(3)An unmanaged index comprised of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. The since inception performance of the index is calculated from 9/30/01 for Class C shares.
PROSPECTUS - First American Income Funds
Fund Summaries
Fees and Expenses
The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Funds.
Core Bond Fund
High Income Fund
Inflation Protected Securities Fund(1)
Total Return Bond Fund
U.S. Government Mortgage Fund
----------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A(2) CLASS B CLASS C CLASS R CLASS Y ----------------------------------------------------------------------------------------------------------------------------- MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (as a percentage of offering price) 4.25% 0.00% 0.00% None None MAXIMUM DEFERRED SALES CHARGE (LOAD) (as a percentage of original purchase price or redemption proceeds, whichever is less) 0.00% 5.00% 1.00% None None ANNUAL MAINTENANCE FEE only charged to accounts with balances below $500 $50 $50 $50 None None --------------------------------------------------------------------------------------------------------------------------------- |
(1)This fund does not offer Class B shares.
(2)Investors may qualify for reduced sales charges. Investments of $1 million or more on which no front-end sales charge is paid may be subject to a 1% contingent deferred sales charge.
Intermediate Government Bond Fund
Intermediate Term Bond Fund
Short Term Bond Fund
--------------------------------------------------------------------------------------------- SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A(1) CLASS Y --------------------------------------------------------------------------------------------- MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (as a percentage of offering price) 2.25% None MAXIMUM DEFERRED SALES CHARGE (LOAD) (as a percentage of original purchase price or redemption proceeds, whichever is less) 0.00% None ANNUAL MAINTENANCE FEE only charged to accounts with balances below $500 $50 None --------------------------------------------------------------------------------------------- |
(1)Investors may qualify for reduced sales charges. Investments of $1 million or more on which no front-end sales charge is paid may be subject to a contingent deferred sales charge.
-----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or
Management Service (12b-1) Other Total Annual Fund
CLASS A Fees Fees(1) Expenses Operating Expenses(2)
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund 0.50% 0.25% 0.28% 1.03%
High Income Fund 0.70% 0.25% 0.34% 1.29%
Inflation Protected Securities Fund 0.50% 0.25% 0.33% 1.08%
Intermediate Government Bond Fund 0.50% 0.25% 0.51% 1.26%
Intermediate Term Bond Fund 0.50% 0.25% 0.28% 1.03%
Short Term Bond Fund 0.50% 0.25% 0.29% 1.04%
Total Return Bond Fund 0.60% 0.25% 0.32% 1.17%
U.S. Government Mortgage Fund 0.50% 0.25% 0.36% 1.11%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The distributor is currently limiting its Class A 12b-1 fee for Intermediate Government Bond Fund, Intermediate Term Bond Fund, and Short Term Bond Fund to 0.15%. This limitation may be terminated at any time.
(2)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.95% for Core Bond Fund and U.S. Government Mortgage Fund, 1.10% for High Income Bond Fund, 0.85% for Inflation Protected Securities Fund and Intermediate Term Bond Fund, 0.75% for Intermediate Government Bond Fund and Short Term Bond Fund, and 1.00% for Total Return Bond Fund.
PROSPECTUS - First American Income Funds
Fund Summaries
Fees and Expenses CONTINUED
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS B Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund 0.50% 1.00% 0.28% 1.78%
High Income Fund 0.70% 1.00% 0.34% 2.04%
Total Return Bond Fund 0.60% 1.00% 0.32% 1.92%
U.S. Government Mortgage Fund 0.50% 1.00% 0.36% 1.86%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 1.70% for Core Bond Fund and U.S. Government Mortgage Fund, 1.85% for High Income Bond Fund, and 1.75% for Total Return Bond Fund.
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS C Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund 0.50% 1.00% 0.28% 1.78%
High Income Fund 0.70% 1.00% 0.34% 2.04%
Inflation Protected Securities Fund 0.50% 1.00% 0.33% 1.83%
Total Return Bond Fund 0.60% 1.00% 0.32% 1.92%
U.S. Government Mortgage Fund 0.50% 1.00% 0.36% 1.86%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 1.70% for Core Bond Fund and U.S. Government Mortgage Fund, 2.02% for High Income Bond Fund, 1.60% for Inflation Protected Securities Fund, and 1.75% for Total Return Bond Fund.
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS R Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund 0.50% 0.50% 0.28% 1.28%
High Income Fund 0.70% 0.50% 0.34% 1.54%
Inflation Protected Securities Fund 0.50% 0.50% 0.33% 1.33%
Total Return Bond Fund 0.60% 0.50% 0.32% 1.42%
U.S. Government Mortgage Fund 0.50% 0.50% 0.36% 1.36%
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(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers, restated to reflect current fees. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 1.20% for Core Bond Fund and U.S. Government Mortgage Fund, 1.35% for High Income Bond Fund, 1.10% for Inflation Protected Securities Fund, and 1.25% for Total Return Bond Fund.
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Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS Y Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Core Bond Fund 0.50% None 0.28% 0.78%
High Income Fund 0.70% None 0.34% 1.04%
Inflation Protected Securities Fund 0.50% None 0.33% 0.83%
Intermediate Government Bond Fund 0.50% None 0.51% 1.01%
Intermediate Term Bond Fund 0.50% None 0.28% 0.78%
Short Term Bond Fund 0.50% None 0.29% 0.79%
Total Return Bond Fund 0.60% None 0.32% 0.92%
U.S. Government Mortgage Fund 0.50% None 0.36% 0.86%
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(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.70% for Core Bond Fund, Intermediate Term Bond Fund, and U.S. Government Mortgage Fund, 0.85% for High Income Bond Fund, 0.60% for Inflation Protected Securities Fund, Intermediate Government Bond Fund, and Short Term Bond Fund, and 0.75% for Total Return Bond Fund.
EXAMPLE This example is intended to help you compare the cost of investing in a fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 for the time periods indicated, that your investment has a 5% return each year, and that the funds' operating expenses remain the same. Although your actual costs and returns may differ, based on these assumptions your costs would be:
CLASS A 1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------------------------------------------------------- Core Bond Fund $526 $739 $ 969 $1,631 --------------------------------------------------------------------------------------------------------------------------- High Income Bond Fund $551 $817 $1,102 $1,915 --------------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund $530 $754 $ 995 $1,686 --------------------------------------------------------------------------------------------------------------------------- Intermediate Government Bond $350 $616 $ 901 $1,713 --------------------------------------------------------------------------------------------------------------------------- Intermediate Term Bond Fund $328 $545 $ 781 $1,456 --------------------------------------------------------------------------------------------------------------------------- Short Term Bond Fund $329 $548 $ 786 $1,467 --------------------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $539 $781 $1,041 $1,785 --------------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $533 $763 $1,011 $1,719 |
PROSPECTUS - First American Income Funds
Fund Summaries
Fees and Expenses CONTINUED
CLASS B (assuming redemption at end of each period) 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $681 $ 960 $1,164 $1,897 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $707 $1,040 $1,298 $2,176 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $695 $1,003 $1,237 $2,048 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $689 $ 985 $1,206 $1,984 |
CLASS B (assuming no redemption at end of each period) 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $181 $560 $ 964 $1,897 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $207 $640 $1,098 $2,176 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $195 $603 $1,037 $2,048 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $189 $585 $1,006 $1,984 |
CLASS C (assuming redemption at end of each period) 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $281 $560 $ 964 $2,095 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $307 $640 $1,098 $2,369 ----------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund $286 $576 $ 990 $2,148 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $295 $603 $1,037 $2,243 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $289 $585 $1,006 $2,180 |
CLASS C (assuming no redemption at end of each period) 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $181 $560 $ 964 $2,095 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $207 $640 $1,098 $2,369 ----------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund $186 $576 $ 990 $2,148 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $195 $603 $1,037 $2,243 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $189 $585 $1,006 $2,180 |
CLASS R 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $130 $406 $702 $1,545 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $157 $486 $839 $1,834 ----------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund $135 $421 $729 $1,601 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $145 $449 $776 $1,702 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $138 $431 $745 $1,635 |
CLASS Y 1 Year 3 Years 5 Years 10 Years ----------------------------------------------------------------------------------------------------------------- Core Bond Fund $ 80 $249 $433 $ 966 ----------------------------------------------------------------------------------------------------------------- High Income Bond Fund $106 $331 $574 $1,271 ----------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Fund $ 85 $265 $460 $1,025 ----------------------------------------------------------------------------------------------------------------- Intermediate Government Bond Fund $103 $322 $558 $1,236 ----------------------------------------------------------------------------------------------------------------- Intermediate Term Bond Fund $ 80 $249 $433 $ 966 ----------------------------------------------------------------------------------------------------------------- Short Term Bond Fund $ 81 $252 $439 $ 978 ----------------------------------------------------------------------------------------------------------------- Total Return Bond Fund $ 94 $293 $509 $1,131 ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund $ 88 $274 $477 $1,061 |
PROSPECTUS - First American Income Funds
More About The Funds
Investment Strategies, Risks and Other Investment Matters
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may be changed without shareholder approval. If a fund's objective changes, you will be notified at least 60 days in advance. Please remember, there is no guarantee that any fund will achieve its objective.
INVESTMENT STRATEGIES
The funds' principal investment strategies are discussed in the "Fund Summaries" section. These are the strategies that the funds' investment advisor believes are most likely to be important in trying to achieve the funds' objectives. This section provides more information about some of the funds' principal and non-principal investment strategies. You should be aware that each fund may also use strategies and invest in securities that are not described in this prospectus, but that are described in the Statement of Additional Information (SAI). For a copy of the SAI, call Investor Services at 800 677-FUND.
U.S. Government Agency Securities. The U.S. Government agency securities in which the funds may invest include securities issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Federal Farm Credit Bank (FFCB), the U.S. Agency for International Development (U.S. AID), the Federal Home Loan Banks (FHLB) and the Tennessee Valley Authority (TVA). Securities issued by GNMA, TVA and U.S. AID are backed by the full faith and credit of the U.S. Government. Securities issued by FNMA and FHLMC are supported by the right to borrow directly from the U.S. Treasury. The other U.S. Government agency and instrumentality securities in which the funds invest are backed solely by the credit of the agency or instrumentality issuing the obligations. 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.
Inflation Protected Securities Fund may invest in inflation protected securities issued by U.S. Government agencies. Currently, there are such securities available in the secondary market that have been issued by FNMA, FHLB, and TVA.
Asset-Backed Securities. Asset-backed securities in which the funds may invest are supported by credit card loans, automobile loans, home equity loans, corporate bonds, commercial loans, or other loans or receivables that by their terms convert into cash within a finite time period.
Effective Maturity and Effective Duration. Certain funds attempt to maintain a specified weighted average effective maturity and/or average effective duration. Effective maturity differs from actual stated or final maturity, which may be substantially longer. In calculating effective maturity, the advisor estimates the effect of expected principal payments and call provisions on securities held in the portfolio. Effective maturity provides the advisor with a better estimate of interest rate risk under normal market conditions, but may underestimate interest rate risk in an environment of adverse (rising) interest rates.
Effective duration, another measure of interest rate risk, measures how much the value of a security is expected to change with a given change in interest rates. The longer a security's effective duration, the more sensitive its price to changes in interest rates. For example, if interest rates were to increase by one percentage point, the market value of a bond with an effective duration of five years would decrease by 5%, with all other factors being constant. However, all other factors are rarely constant. Effective duration is based on assumptions and subject to a number of limitations. It is most useful when interest rate changes are small, rapid, and occur equally in short-term and long-term securities. In addition, it is difficult to calculate precisely for bonds with prepayment options, such as mortgage- and asset-backed securities, because the calculation requires assumptions about prepayment rates. For these reasons, the effective durations of funds which invest a significant portion of their assets in these securities can be greatly affected by changes in interest rates.
Ratings. Certain funds have investment strategies requiring them to invest in debt securities that have received a particular rating from a rating service such as Moody's or Standard & Poor's. Any reference in this prospectus to a specific rating encompasses all gradations of that rating. For example, if the prospectus says that a fund may invest in securities rated as low as B, the fund may invest in securities rated B-.
Temporary Investments. In an attempt to respond to adverse market, economic, political, or other conditions, each fund may temporarily invest without limit in cash and in U.S. dollar-denominated high-quality money market instruments and other short-term securities, including money market funds advised by the funds' advisor. These investments may result in a lower yield than would be available from investments with a lower quality or longer term and may prevent a fund from achieving its investment objectives.
Portfolio Turnover. Fund managers may trade securities frequently, resulting, from time to time, in an annual portfolio turnover rate of over 100%. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of commissions or mark-ups to broker-dealers that the fund pays when it buys and sells securities. The "Financial Highlights" section of this prospectus shows each fund's historical portfolio turnover rate.
PRINCIPAL RISKS
The principal risks of investing in each fund are identified in the "Fund Summaries" section. These risks are described below.
PROSPECTUS - First American Income Funds
More About The Funds
Investment Strategies, Risks and Other Investment Matters CONTINUED
Active Management Risk. Each fund is actively managed and its performance therefore will reflect in part the advisor's ability to make investment decisions which are suited to achieving the fund's investment objective. Due to its active management, a fund could underperform other mutual funds with similar investment objectives.
Call Risk. Each of the funds may invest in debt securities, which are subject to call risk. Bonds may be redeemed at the option of the issuer, or "called," before their stated maturity date. In general, an issuer will call its bonds if they can be refinanced by issuing new bonds which bear a lower interest rate. Each of the funds is subject to the possibility that during periods of falling interest rates, a bond issuer will call its high-yielding bonds. A fund would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the fund's income.
Credit Risk. Each fund is subject to the risk that the issuers of debt securities held by the fund will not make payments on the securities, or that the other party to a contract (such as a repurchase agreement) will default on its obligations. There is also the risk that an issuer could suffer adverse changes in financial condition that could lower the credit quality of a security. This could lead to greater volatility in the price of the security and in shares of a fund. Also, a change in the credit quality rating of a bond could affect the bond's liquidity and make it more difficult for a fund to sell. When a fund purchases unrated securities, it will depend on the advisor's analysis of credit risk without the assessment of an independent rating organization, such as Moody's or Standard & Poor's.
Intermediate Government Bond Fund and U.S. Government Mortgage Fund invest primarily in U.S. government securities, which have historically involved little risk of loss of principal if held to maturity. Nevertheless, certain of these securities are supported only by the credit of the issuer or instrumentality. Core Bond Fund, Intermediate Bond Fund and Short-Term Bond Fund attempt to minimize credit risk by investing in securities considered at least investment grade at the time of purchase. However, all of these securities, especially those in the lower investment grade rating categories, have credit risk. In adverse economic or other circumstances, issuers of these lower rated securities are more likely to have difficulty making principal and interest payments than issuers of higher rated securities.
Derivative Instrument Risk. The use of derivative instruments exposes a fund to additional risks and transaction costs. Risks inherent in the use of derivative instruments include: the risk that securities prices, foreign currencies, index prices, or interest rates will not move in the direction that the advisor anticipates; in the case of a credit default swap, the risk that the advisor will not correctly evaluate the creditworthiness of the company or companies on which the swap is based; an imperfect correlation between the price of derivative instruments and movements in the prices of the securities being hedged; the possible absence of a liquid secondary market for any particular instrument and possible exchange imposed price fluctuation limits, either of which may make it difficult or impossible to close out a position when desired; leverage risk, which is the risk that adverse price movements in an instrument can result in a loss substantially greater than the fund's initial investment in that instrument; and, particularly in the case of privately negotiated instruments, the risk that the counterparty will fail to perform its obligations, which could leave the fund worse off than if it had not entered into the position. If a fund uses derivative instruments and the advisor's judgment proves incorrect, the fund's performance could be worse than if it had not used these instruments.
The funds may enter into over-the-counter (OTC) transactions in derivatives. Transactions in the OTC markets generally are conducted on a principal-to-principal basis. The terms and conditions of these instruments generally are not standardized and tend to be more specialized or complex, and the instruments may be harder to value. In addition, there may not be a liquid market for OTC derivatives. As a result, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price.
Inflation Protected Securities Fund's investments in commodity-linked derivative instruments may subject the fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments.
Dollar Roll Transaction Risk. In a dollar roll transaction, a fund sells mortgage-backed securities for delivery in the current month while contracting with the same party to repurchase similar securities at a future date. Because the fund gives up the right to receive principal and interest paid on the securities sold, a mortgage dollar roll transaction will diminish the investment performance of a fund unless the difference between the price received for the securities sold and the price to be paid for the securities to be purchased in the future, plus any fee income received, exceeds any income, principal payments, and appreciation on the securities sold as part of the mortgage dollar roll. Whether mortgage dollar rolls will benefit a fund may depend upon the advisor's ability to predict mortgage prepayments and interest rates. In addition, the use of mortgage dollar rolls by a fund increases the amount of the fund's assets that are subject to market risk, which could increase the volatility of the price of the fund's shares.
Emerging Markets Risk. The risks of international investing are particularly significant in emerging markets. Investing in emerging markets generally involves exposure to economic structures that are less diverse and mature, and to political systems that are less stable (which includes an
PROSPECTUS - First American Income Funds
More About The Funds
Investment Strategies, Risks and Other Investment Matters CONTINUED
amplified risk of war and terrorism), than those of developed countries. In addition, issuers in emerging markets typically are subject to a greater degree of change in earnings and business prospects than are companies in developed markets. Fluctuations in the prices of securities of issuers in emerging markets can be especially sudden and substantial. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on economies and securities markets of certain emerging market countries.
Foreign Security Risk. Each fund (other than Intermediate Government Bond Fund and U.S. Government Mortgage Fund) may invest in dollar denominated foreign securities. Securities of foreign issuers, even when dollar-denominated and publicly traded in the United States, may involve risks not associated with the securities of domestic issuers. For certain foreign countries, political or social instability, or diplomatic developments could adversely affect the securities. There is also the risk of loss due to governmental actions such as a change in tax statutes or the modification of individual property rights. In addition, individual foreign economies may differ favorably or unfavorably from the U.S. economy.
High-Yield Securities Risk. A significant portion of the portfolio of High Income Bond Fund, and up to 10% of the net assets of Inflation Protected Securities Fund and 20% of the total assets of Total Return Bond Fund, may consist of lower-rated corporate debt obligations, which are commonly referred to as "high-yield" securities or "junk bonds." Although these securities usually offer higher yields than investment grade securities, they also involve more risk. High-yield bonds may be more susceptible to real or perceived adverse economic conditions than investment grade bonds. In addition, the secondary trading market may be less liquid. High-yield securities generally have more volatile prices and carry more risk to principal than investment grade securities.
Income Risk. Each fund's income could decline due to falling market interest rates. This is because, in a falling interest rate environment, the funds generally will have to invest the proceeds from sales of fund shares, as well as the proceeds from maturing portfolio securities (or portfolio securities that have been called, see "Call Risk" above, or prepaid, see "Mortgage and Asset-Backed Securities Risk" below), in lower-yielding securities.
Indexing Methodology Risk. Interest payments on inflation protected debt securities will vary with the rate of inflation, as measured by a specified index. There can be no assurance that the CPI-U (used as the inflation measure by U.S. Treasury inflation protected securities) or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. If the market perceives that the adjustment mechanism of an inflation protected security does not accurately adjust for inflation, the value of the security could be adversely affected. There may be a lag between the time a security is adjusted for inflation and the time interest is paid on that security. This may have an adverse effect on the trading price of the security, particularly during periods of significant, rapid changes in inflation. In addition, to the extent that inflation has increased during the period of time between the inflation adjustment and the interest payment, the interest payment will not be protected from the inflation increase.
Interest Rate Risk. Debt securities in the funds will fluctuate in value with changes in interest rates. In general, debt securities will increase in value when interest rates fall and decrease in value when interest rates rise. Longer-term debt securities are generally more sensitive to interest rate changes. Securities which do not pay interest on a current basis, such as zero coupon securities and delayed interest securities, may be highly volatile as interest rates rise or fall.
The effect of interest rate changes on the inflation protected securities held by Inflation Protected Securities Fund will be somewhat different. Interest rates have two components: a "real" interest rate and an increment that reflects investor expectations of future inflation. Because interest rates on inflation protected securities are adjusted for inflation, the values of these securities are not materially affected by inflation expectations. Therefore, the values of inflation protected debt securities are expected to change in response to changes in "real" interest rates. Generally, the value of an inflation protected debt security will fall when real interest rates rise and rise when real interest rates fall.
International Investing Risk. Inflation Protected Securities Fund and Total Return Bond Fund may invest up to 20% of their net assets in non-dollar denominated foreign securities. Investing in these securities involves risks not typically associated with U.S. investing. These risks include:
Currency Risk. Because foreign securities often trade in currencies other than the U.S. dollar, changes in currency exchange rates will affect the funds' net asset value, the value of dividends and interest earned, and gains and losses realized on the sale of securities. A strong U.S. dollar relative to these other currencies will adversely affect the value of the funds.
Foreign Securities Market Risk. Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. Securities of companies traded in many countries outside the U.S., particularly emerging markets countries, may be subject to further risks due to the inexperience of local investment professionals and financial institutions, the possibility of permanent or temporary termination of trading, and greater spreads between bid and asked prices for securities. In addition, non-U.S. stock exchanges and investment professionals are subject to less governmental regulation, and commissions may
PROSPECTUS - First American Income Funds
More About The Funds
Investment Strategies, Risks and Other Investment Matters CONTINUED
be higher than in the United States. Also, there may be delays in the settlement of non-U.S. stock exchange transactions.
Foreign Tax Risk. The funds' income from foreign issuers may be subject to non-U.S. withholding taxes. In some countries, the funds also may be subject to taxes on trading profits and, on certain securities transactions, transfer or stamp duties tax. To the extent foreign income taxes are paid by the funds, U.S. shareholders may be entitled to a credit or deduction for U.S. tax purposes. See the SAI for details.
Information Risk. Non-U.S. companies generally are not subject to uniform accounting, auditing, and financial reporting standards or other regulatory requirements that apply to U.S. companies. As a result, less information may be available to investors concerning non-U.S. issuers. Accounting and financial reporting standards in emerging markets may be especially lacking.
Investment Restriction Risk. Some countries, particularly emerging markets, restrict to varying degrees foreign investment in their securities markets. In some circumstances, these restrictions may limit or preclude investment in certain countries or may increase the cost of investing in securities of particular companies.
Political and Economic Risks. International investing is subject to the risk of political, social, or economic instability in the country of the issuer of a security, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, and nationalization of assets.
Liquidity Risk. High Income Bond Fund, Inflation Protected Securities Fund and Total Return Bond Fund are exposed to liquidity risk because of their investment in high-yield bonds. Trading opportunities are more limited for debt securities that have received ratings below investment grade. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, these funds may have to accept a lower price to sell a security, sell other securities to raise cash, or give up an investment opportunity, any of which could have a negative effect on a fund's performance. Infrequent trading may also lead to greater price volatility.
Mortgage- and Asset-Backed Securities Risk. Mortgage-backed securities are secured by and payable from pools of mortgage loans. Similarly, asset-backed securities are supported by obligations such as automobile loans, home equity loans, corporate bonds, or commercial loans. These mortgages and other obligations generally can be prepaid at any time without penalty. As a result, mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that falling interest rates could cause prepayments of the securities to occur more quickly than expected. This occurs because, as interest rates fall, more homeowners refinance the mortgages underlying mortgage-related securities or prepay the debt obligations underlying asset-backed securities. A fund holding these securities must reinvest the prepayments at a time when interest rates are falling, reducing the income of the fund. In addition, when interest rates fall, prices on mortgage- and asset-backed securities may not rise as much as for other types of comparable debt securities because investors may anticipate an increase in prepayments.
Mortgage-and asset-backed securities are also subject to extension risk, which is the risk that rising interest rates could cause mortgages or other obligations underlying the securities to be prepaid more slowly than expected, resulting in slower prepayments of the securities. This would, in effect, convert a short-or medium-duration mortgage- or asset-backed security into a longer-duration security, increasing its sensitivity to interest rate changes and causing its price to decline.
Tax Consequences of Inflation Adjustments. Periodic adjustments for inflation to the principal amount of an inflation protected security will give rise to original issue discount, which will be includable in gross income for Inflation Protected Securities Fund. Because the fund is required to distribute its taxable income to avoid corporate level tax, the fund may be required to make annual distributions to shareholders that exceed the cash it receives, which may require the fund to liquidate certain investments when it is not advantageous to do so.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the funds' policies and procedures with respect to the disclosure of each fund's portfolio securities is available in the funds' SAI.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares
GENERAL
You may purchase, redeem, or exchange shares of the funds on any day when the New York Stock Exchange (NYSE) is open, except that shares cannot be purchased by wire transfer on days that federally chartered banks are closed. Purchases, redemptions and exchanges may be restricted in the event of an early or unscheduled close of the NYSE.
The funds have authorized certain investment professionals and financial institutions ("financial intermediaries") to accept purchase, redemption, or exchange orders on their behalf. Your purchase or redemption price will be based on that day's net asset value (NAV) per share if your order is received by the funds or an authorized financial intermediary in proper form prior to the time the funds calculate their NAV. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Calculating Net Asset Value" below. Contact your financial intermediary to determine the time by which it must receive your order to be assured same day processing. To make sure your order is in proper form, you must follow the instructions set forth below under "Purchase, Redemption and Exchange Procedures."
Some financial intermediaries may charge a fee for helping you purchase, redeem or exchange shares. Contact your financial intermediary for more information. No such fee will be imposed if you purchase shares directly from the funds.
The funds may be offered only to persons in the United States. This prospectus should not be considered a solicitation or offering of fund shares outside the United States.
CHOOSING A SHARE CLASS
The funds issue their shares in two or more classes, as indicated by an "x" in the following table, with each class having a different cost structure. As noted below, only certain eligible investors can purchase Class R and Class Y shares of the funds, whereas Class A, Class B and Class C shares (the "Retail Share Classes") are generally available to investors. You should decide which share class best suits your needs.
Share Class
FUND A B C R Y
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CORE BOND FUND x x x x x
HIGH INCOME BOND FUND x x x x x
INFLATION PROTECTED SECURITIES FUND x x x x
INTERMEDIATE GOVERNMENT BOND FUND x x
INTERMEDIATE TERM BOND FUND x x
SHORT TERM BOND FUND x x
TOTAL RETURN BOND FUND x x x x x
U.S. GOVERNMENT MORTGAGE FUND x x x x x
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Eligibility to Invest in Class R and Class Y Shares
CLASS R SHARES generally are available only to 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing and money purchase pension plans, defined benefit plans and nonqualified deferred compensation plans ("retirement plans"), and must be held in plan level or omnibus accounts.
Class R shares are not available to retail retirement or non-retirement accounts, Traditional and Roth Individual Retirement Accounts (IRAs), Coverdell Education Savings Accounts, SEPs, SARSEPs, SIMPLE IRAs, individual 403(b) plans and 529 college savings plans.
CLASS Y SHARES are offered to clients of financial intermediaries who have been authorized to offer Class Y shares and who charge such clients an ongoing fee for advisory, investment, consulting or similar services. Such clients may include, but are not limited to, individuals, corporations, endowments and pension plans (including tax-deferred retirement plans and profit sharing plans).
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Class Share Overview
ANNUAL 12B-1 FEES
(AS A % OF NET ASSETS)
--------------------------------
FRONT-END CONTINGENT SHAREHOLDER
SALES CHARGE DEFERRED SALES DISTRIBUTION SERVICING
(FESC) CHARGE (CDSC) FEE FEE
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Class A 2.25%-4.25%(1) 0.00%(2) No 0.25%
Class B(3) 0.00% 5.00%(4) 0.75% 0.25%
Class C(5) 0.00% 1.00%(6) 0.75% 0.25%
Class R No No 0.50% No
Class Y No No No No
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(1)The FESC differs by fund and is reduced for larger purchases. See
"Determining Your Share Price -- Class A Shares" below.
(2)Class A share investments of $1 million or more on which no FESC is paid may
be subject to a 1% CDSC.
(3)Class B shares automatically convert to Class A shares eight years after
purchase, which reduces future annual expenses since Class A shares have
lower annual expenses.
(4)A CDSC of up to 5.00% applies to Class B shares if you redeem shares within
six years of purchase. The CDSC declines over the six years as described
below under "Determining Your Share Price -- Class B Shares."
(5)Class C shares do not convert to Class A shares so they will continue to have
higher annual expenses than Class A shares for as long as you hold them.
(6)A 1.00% CDSC applies if you redeem your Class C shares within 12 months of
purchase.
Among the Retail Share Classes, Class A shares may be a better choice if your investment qualifies for a reduced sales charge. You should not place Class B or Class C share orders that would cause your total investment in First American Funds Class A, Class B and Class C shares (not including First American money market funds) to equal or exceed $100,000 in the case of an order for Class B shares or $1 million dollars in the case of an order for Class C shares, using the aggregation principles discussed below under "Determining Your Share Price -- Class A Shares -- Reducing Your Sales Charge on Class A Shares." To the extent operationally possible, these orders will be automatically rejected.
Class R or Class Y shares are generally a better choice than a Retail Share Class if you are eligible to purchase these share classes. However, if you intend to hold your shares for a long time, or if you are eligible to invest in Class A shares with a reduced or waived sales charge, Class A may be a better choice than an investment in Class R shares.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
DETERMINING YOUR SHARE PRICE
Class A Shares
Your purchase price for Class A shares is typically the net asset value of your shares, plus a front-end sales charge. Sales charges vary depending on the amount of your purchase. The sales charge you pay may differ slightly from the amount set forth below because of rounding that occurs in the calculation used to determine your sales charge.
Core Bond Fund
High Income Bond Fund
Intermediate Government Bond Fund Inflation Protected Securities Fund
Intermediate Term Bond Fund Total Return Bond Fund
Short Term Bond Fund U.S. Government Mortgage Fund
--------------------------------- -----------------------------------
Sales Charge Sales Charge
--------------------------------- -----------------------------------
As a % As a % As a % As a %
of of Net of of Net
Offering Asset Offering Asset
Purchase Amount Price Value Price Value
------------------------------------------------------------------------------------------------------------------------
Less than $50,000 2.25% 2.30% 4.25% 4.44%
$50,000 - $99,999 2.00% 2.04% 4.00% 4.17%
$100,000 - $249,999 1.75% 1.78% 3.50% 3.63%
$250,000 - $499,999 1.25% 1.27% 2.50% 2.56%
$500,000 - $999,999 1.00% 1.01% 2.00% 2.04%
$1 million and over 0.00% 0.00% 0.00% 0.00%
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Reducing Your Sales Charge on Class A Shares. As shown in the preceding table, larger purchases of Class A shares reduce the percentage sales charge you pay. In determining whether you are entitled to pay a reduced sales charge, you may aggregate certain other purchases with your current purchase, as follows.
Prior Purchases. Prior purchases of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) will be factored into your sales charge calculation. You will receive credit for the current net asset value of the other Class A, Class B, and Class C shares you hold at the time of your purchase, including shares held in individual retirement, custodial or personal trust accounts. For example, let's say you're making a $10,000 investment and you already own other First American Fund Class A shares that are currently valued at $45,000. You will receive credit for the current value of these shares and your sales charge will be based on a total purchase amount of $55,000. If the current net asset value of your shares is less than their original purchase price, you may receive credit for their original purchase price instead, but only if you provide a written necessary to demonstrate the shares' purchase price.
Purchases by Related Accounts. Concurrent and prior purchases by certain other accounts of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) also will be combined with your purchase to determine your sales charge. The fund will combine purchases made by you, your spouse or domestic partner, and your dependent children when it calculates the sales charge, including purchases in individual retirement, custodial and personal trust accounts.
Letter of Intent. If you plan to invest $50,000 or more over a 13-month period in Class A, Class B, or Class C shares of any First American Fund except the money market funds, you may reduce your sales charge for Class A purchases by signing a non-binding letter of intent. If you do not fulfill the letter of intent, you must pay the applicable sales charge. In addition, if you reduce your sales charge to zero under a letter of intent and then sell your Class A shares within 18 months of their purchase, you may be charged a contingent deferred sales charge of 1%. See "Class A Share Investments of Over $1 Million" below.
It is your responsibility to determine whether you are entitled to pay a reduced sales charge. The fund is not responsible for making this determination. To receive a reduced sales charge, you must notify the fund at the time of the purchase order that a quantity discount may apply to your current purchase. If you purchase shares by mail, you must notify the fund in writing. Otherwise, simply inform your financial intermediary, or Investor Services if you are purchasing shares directly from the funds, and they will notify the fund.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
You should provide your financial intermediary with information or records regarding any other accounts in which there are holdings eligible to be aggregated, including:
- all of your accounts at your financial intermediary.
- all of your accounts at any other financial intermediary.
- all accounts of any related party (such as a spouse or dependent child) held with any financial intermediary.
You should keep the records necessary to demonstrate the purchase price of shares held in these accounts since neither the fund and its transfer agent nor your financial intermediary may have this information.
More information on these ways to reduce your sales charge appears in the SAI.
Purchasing Class A Shares Without a Sales Charge. The following persons may purchase a fund's Class A shares at net asset value without a sales charge:
- directors, advisory board members, full-time employees and retirees of the advisor and its affiliates.
- current and retired officers and directors of the funds.
- full-time employees of any broker-dealer authorized to sell fund shares.
- full-time employees of the fund's counsel.
- members of the immediate families of any of the foregoing (i.e., a spouse or domestic partner and any dependent children).
- persons who purchase the funds through "one-stop" mutual fund networks through which the funds are made available.
- persons participating in a fee-based program sponsored and maintained by a registered broker-dealer.
- trust companies and bank trust departments acting in a fiduciary, advisory, agency, custodial or similar capacity.
- group retirement plans sponsored or administered by affiliates of the advisor.
- group retirement plans with at least $2.5 million in plan assets. (This minimum may be waived at the discretion of the distributor for purchases by group retirement plans made through financial institutions such as banks or record keepers.)
- certain Country Fund shareholders purchasing shares of High Income Bond Fund. See the fund's SAI.
Reinvesting After a Redemption. If you redeem Class A shares of a First American Fund (except money market fund shares on which you have not paid a sales charge), you may reinvest in Class A shares of that fund or another First American Fund within 180 days without a sales charge. To reinvest in Class A shares at net asset value (without paying a sales charge), you must notify the Fund directly in writing or notify your financial intermediary.
Class A Share Investments of Over $1 Million. There is no initial sales charge on Class A share purchases of $1 million or more (including purchases that reach the $1 million level as a result of aggregating prior purchases and purchases by related accounts). However, your financial intermediary may receive a commission of up to 1% on your purchase. If such a commission is paid, you will be assessed a contingent deferred sales charge (CDSC) of 1% if you sell your shares within 18 months. The CDSC you pay may differ slightly from this amount because of rounding that occurs in the calculation used to determine your CDSC. To find out whether you will be assessed a CDSC, ask your financial intermediary.
The CDSC is based on the value of your shares at the time of purchase in the case of a partial redemption. If you redeem all of your shares, the CDSC is based on the value of your shares at the time of purchase or at the time of redemption, whichever is less. The charge does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class A shares that are not subject to a CDSC will be redeemed first. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
Additional Information on Reducing Sales Charges. A link to information regarding the funds' Class A sales charge breakpoints is available on the funds' web site at www.firstamericanfunds.com.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Class B Shares
Your purchase price for Class B shares is their net asset value -- there is no front-end sales charge. However, if you redeem your shares within six years of purchase, you will pay a CDSC, as reflected in the following table.
Year since purchase of CDSC as a % of the Year since purchase of CDSC as a % of the original fund shares value of your shares original fund shares value of your shares ---------------------------------------------------- ---------------------------------------------------- First 5.00% Fifth 2.00% Second 5.00% Sixth 1.00% Third 4.00% Seventh 0.00% Fourth 3.00% Eighth 0.00% |
The CDSC you pay may differ slightly from the amount set forth above because of rounding that occurs in the calculation used to determine your CDSC.
Your CDSC will be based on the value of your shares at the time of purchase or at the time of redemption, whichever is less. The charge does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class B shares that are not subject to a CDSC will be redeemed first; other Class B shares will then be redeemed in an order that minimizes your CDSC. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
Your Class B shares and any related shares acquired by reinvesting your dividend or capital gain distributions will automatically convert to Class A shares eight years after the beginning of the month in which you purchased the shares.
Class C Shares
Your purchase price for Class C shares is their net asset value -- there is no front-end sales charge. However, if you redeem your shares within 12 months of purchase, you will be assessed a CDSC of 1% of the value of your shares at the time of purchase or at the time of sale, whichever is less. The CDSC you pay may differ slightly from this amount because of rounding that occurs in the calculation used to determine your CDSC. The CDSC does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class C shares that are not subject to a CDSC will be redeemed first. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
Unlike Class B shares, Class C shares do not convert to Class A shares after a specified period of time. Therefore, your shares will continue to have higher annual expenses than Class A shares.
Retirement Plan Availability of Class B and Class C Shares
Class B and Class C shares are available to individual plans and certain smaller group plans, such as SIMPLE and SEP plans. Class B and Class C shares are not available to certain employer-sponsored plans, such as 401(k), employer-sponsored 403(b), money purchase and profit sharing plans.
Waiving Contingent Deferred Sales Charges
CDSCs on Class A, Class B and Class C share redemptions will be waived for:
- redemptions following the death or disability (as defined in the Internal Revenue Code) of a shareholder.
- redemptions that equal the minimum required distribution from an IRA or other retirement plan to a shareholder who has reached the age of 70 1/2.
- redemptions through a systematic withdrawal plan, at a rate of up to 12% a year of your account's value. The systematic withdrawal limit will be based on the market value of your account at the time of each withdrawal.
- redemptions required as a result of over-contribution to an IRA plan.
Class R and Class Y Shares
Your purchase price for Class R and Class Y shares is their net asset value. These share classes do not have a front-end sales charge or a CDSC.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
12B-1 FEES
Each fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act that allows each fund to pay the fund's distributor an annual fee for the distribution and sale of its shares and/or for services provided to shareholders. The funds do not pay 12b-1 fees on Class Y shares.
For: 12b-1 fees are equal to:
------------------------------------------------------------------------------------------------
Class A 0.25% of average daily net
assets(1)
Class B 1.00% of average daily net assets
Class C 1.00% of average daily net assets
Class R 0.50% of average daily net assets
Class Y Not applicable
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(1)The distributor has agreed to limit its Class A share 12b-1 fee for Intermediate Government Bond Fund, Intermediate Term Bond Fund, and Short Term Bond Fund to 0.15%. Therefore, the distributor will proportionately reduce the annual fee referred to below that it pays to intermediaries in connection with their sales of Class A shares of those funds. See "Compensation Paid to Financial Intermediaries -- 12b-1 Fees" below.
The 12b-1 fees paid by the funds are designated as distribution fees and/or shareholder servicing fees, as described above under "Class Share Overview." The funds' distributor uses the 12b-1 fees to compensate financial intermediaries for sales and/or administrative services performed on behalf of fund shareholders. Because these fees are paid out of a fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
COMPENSATION PAID TO FINANCIAL INTERMEDIARIES
The funds' distributor receives any front-end sales charge or CDSC that you pay and any 12b-1 fees paid by the funds. From this revenue, the distributor will pay financial intermediaries for the services they provide. The funds' advisor and/or distributor may make additional payments to intermediaries from their own assets, as described below under "Additional Payments to Financial Intermediaries."
Sales Charge Reallowance
The distributor pays (or "reallows") a portion of the front-end sales charge on Class A shares to your financial intermediary, as follows.
Core Bond Fund
High Income Bond Fund
Intermediate Government Bond Fund Inflation Protected Securities Fund
Intermediate Term Bond Fund Total Return Bond Fund
Short Term Bond Fund U.S. Government Mortgage Fund
--------------------------------- -----------------------------------
Maximum Reallowance Maximum Reallowance
as a % of as a % of
Purchase Amount Purchase Price Purchase Price
------------------------------------------------------------------------------------------------------------------------
Less than $50,000 2.00% 4.00%
$50,000 - $99,999 1.75% 3.75%
$100,000 - $249,999 1.50% 3.25%
$250,000 - $499,999 1.00% 2.25%
$500,000 - $999,999 0.75% 1.75%
$1 million and over 0.00% 0.00%
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Sales Commissions
There is no initial sales charge on Class A share purchases of $1 million or more, however, your financial intermediary may receive a commission of up to 1% on your purchase. Although you pay no front-end sales charge when you buy Class B or Class C shares, the funds' distributor pays a sales commission of 4.25% (4.00% for High Income Bond Fund) of the amount invested to financial intermediaries that sell Class B shares and pays a sales commission of 1.00% of the amount invested to intermediaries selling Class C shares.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
12b-1 Fees
The funds' distributor uses the 12b-1 shareholder servicing fee to compensate financial intermediaries for administrative services performed on behalf of the intermediaries' customers. These intermediaries receive shareholder servicing fees of up to 0.25% (0.15% for Intermediate Government Bond Fund, Intermediate Term Bond Fund, and Short Term Bond Fund) of a fund's Class A, Class B, and Class C share average daily net assets attributable to shares sold through them. For Class A shares, the distributor begins to pay shareholder servicing fees to these intermediaries immediately after you purchase shares. For Class B and Class C shares, the distributor begins to pay shareholder servicing fees to these intermediaries one year after you purchase shares, but only if you continue to hold the shares at that time. In both cases, the intermediaries continue to receive these fees for as long as you hold fund shares.
The funds' distributor uses the 12b-1 distribution fee to compensate financial intermediaries for the sale of fund shares to their customers. The funds' distributor pays intermediaries that sell Class C shares a 0.75% annual distribution fee beginning one year after the shares are sold. The funds' distributor pays intermediaries that sell Class R shares a 0.50% annual distribution fee immediately after you purchase shares. The funds' distributor retains the Class B share 0.75% annual distribution fee in order to finance the payment of sales commissions to intermediaries that sell Class B shares.
Additional Payments to Financial Intermediaries
The advisor and/or the distributor may pay additional compensation to financial intermediaries out of their own resources in connection with the sale or retention of fund shares and/or in exchange for sales and/or administrative services performed on behalf of the intermediaries' customers. The amount of these payments may be significant, and may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the funds to you. These payments are not reflected in the fees and expenses listed in the "Fund Summaries" section of the prospectus because they are not paid by the funds.
These payments are negotiated and may be based on such factors as the number or value of shares that the financial intermediary sells or may sell; the value of the assets invested in the funds by the intermediary's customers; reimbursement of ticket or operational charges (fees that an intermediary charges its representatives for effecting transactions in fund shares); lump sum payment for services provided; the type and nature of services or support furnished by the intermediary; and/or other measures as determined from time to time by the advisor and/or distributor.
The advisor and/or distributor may make other payments or allow other promotional incentives to financial intermediaries to the extent permitted by SEC and NASD rules and by other applicable laws and regulations. Certain intermediaries also receive payments in recognition of sub-accounting, recordkeeping or other services they provide to shareholders or plan participants who invest in the fund or other First American Funds through their retirement plan.
You can ask your financial intermediary for information about any payments it receives from the advisor and/or the distributor and from the funds, and any services your intermediary provides, as well as about fees and/or commissions your intermediary charges. You can also find more details about payments made by the advisor, and/or the distributor in the funds' SAI.
PURCHASE, REDEMPTION, AND EXCHANGE PROCEDURES
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
As a result, when you open an account, we will ask for your name, permanent street address, date of birth, and social security or taxpayer identification number. Addresses containing a P.O. Box will not be accepted. We may also ask for other identifying documents or information.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Purchasing Class A, Class B and Class C Shares
You can become a shareholder in any of the funds by making the following minimum initial or additional investments.
MINIMUM MINIMUM
INITIAL ADDITIONAL
ACCOUNT TYPES INVESTMENT INVESTMENT
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Retirement plan, Uniform Gift to Minors Act (UGMA)/
Uniform Transfers to Minors Act (UTMA) accounts $ 500 $ 25
All other accounts $1,000 $100
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The funds have the right to waive these minimum investment requirements for shares offered through certain institutions and for employees of the funds' advisor and its affiliates. The funds also have the right to reject any purchase order.
By Phone. You can purchase shares by calling your financial intermediary, if they have a sales agreement with the funds' distributor. You can also place purchase orders of $100 or more by calling Investor Services at 800 677-FUND. Funds will be transferred electronically from your bank account through the Automated Clearing House (ACH) network. Before making a purchase by electronic funds transfer, you must submit a new account form to the funds and elect this option. Be sure to include all of your banking information on the form.
By Wire. You can purchase shares by making a wire transfer from your bank. Before making an initial investment by wire, you must submit a new account form to the funds. After receiving your form, a service representative will contact you with your account number and wiring instructions. Your order will be priced at the next NAV calculated after the funds' custodian receives your payment by wire. Before making any additional purchases by wire, you should call Investor Services at 800 677-FUND. You cannot purchase shares by wire on days when federally chartered banks are closed.
By Mail. To purchase shares by mail, simply complete and sign a new account form, enclose a check made payable to the fund you wish to invest in, and mail both to:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
After you have established an account, you may continue to purchase shares by mailing your check to First American Funds at the same address.
Please note the following:
- All purchases must be drawn on a bank located within the United States and payable in U.S. dollars to First American Funds.
- Cash, money orders, cashier's checks for less than $10,000, third-party checks, Treasury checks, credit card checks, traveler's checks, starter checks, and credit cards will not be accepted.
- If a check does not clear your bank, the funds reserve the right to cancel the purchase, and you could be liable for any losses or fees incurred by the fund as a result of your check failing to clear.
By Systematic Investment Plan. To purchase shares as part of a savings discipline, you may add to your investment on a regular basis:
- by having $100 or more ($25 for a retirement plan or a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account) automatically withdrawn from your bank account on a periodic basis and invested in fund shares, or
- through automatic monthly exchanges of your First American fund into another First American Fund of the same class.
You may apply for participation in either of these programs through your financial intermediary or by calling Investor Services at 800 677-FUND.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Redeeming Class A, Class B and Class C Shares
When you redeem shares, the proceeds normally will be mailed or wired within three days, but in no event more than seven days, after your request is received in proper form.
By Phone. If you purchased shares through a financial intermediary, simply call them to redeem your shares.
If you did not purchase shares through a financial intermediary, you may redeem your shares by calling Investor Services at 800 677-FUND. Proceeds can be wired to your bank account (if the proceeds are at least $1,000 and you have previously supplied your bank account information to the fund) or sent to you by check. Proceeds also can be sent directly to your bank or brokerage account via electronic funds transfer if your bank or brokerage firm is a member of the ACH network. The First American Funds reserve the right to limit telephone redemptions to $50,000 per day.
If you recently purchased your shares by check or through the ACH network, proceeds from the sale of those shares may not be available until your check or ACH payment has cleared, which may take up to 15 calendar days from the date of purchase.
By Mail. To redeem shares by mail, send a written request to your financial intermediary, or to the fund at the following address:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
Your request should include the following information:
- name of the fund
- account number
- dollar amount or number of shares redeemed
- name on the account
- signatures of all registered account owners
Signatures on a written request must be guaranteed if:
- you would like redemption proceeds to be paid to anyone other than to the shareholder of record.
- you would like the redemption check mailed to an address other than the address on the fund's records, or you have changed the address on the fund's records within the last 30 days.
- your redemption request is for $50,000 or more.
- bank information related to an automatic investment plan, telephone purchase or telephone redemption is changed.
A signature guarantee assures that a signature is genuine and protects shareholders from unauthorized account transfers. Banks, savings and loan associations, trust companies, credit unions, broker-dealers, and member firms of a national securities exchange may guarantee signatures. Call your financial intermediary to determine if it has this capability. A notary public is not an acceptable signature guarantor.
Proceeds from a written redemption request will be sent to you by check unless another form of payment is requested.
By Wire. You can call or write to have redemption proceeds sent to a bank account. See the policies for redeeming shares by phone or by mail. Before requesting to have redemption proceeds sent to a bank account, please make sure the funds have your bank account information on file. If the funds do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. If the bank and fund accounts do not have at least one common owner, you must provide written instructions signed by all fund and bank account owners, and each individual must have their signature guaranteed.
By Systematic Withdrawal Plan. If your account has a value of $5,000 or more, you may redeem a specific dollar amount from your account on a regular basis. To set up systematic withdrawals, contact your financial intermediary.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
You should not make systematic withdrawals if you plan to continue investing in a fund, due to sales charges and tax liabilities.
Exchanging Class A, Class B and Class C Shares
If your investment goals or your financial needs change, you may move from one First American Fund to another First American Fund. There is no fee to exchange shares.
Generally, you may exchange your shares only for the same class of shares of the other fund, with certain exceptions, including:
- You may exchange your Class A shares for Class Y shares of the same or another First American Fund if you subsequently become eligible to purchase Class Y shares.
- If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
Exchanges are made based on the net asset value per share of each fund at the time of the exchange. When you exchange your Class A shares of one of the funds for Class A shares of another First American Fund, you do not have to pay a sales charge. When you exchange your Class B or Class C shares for Class B or Class C shares of another First American Fund, the time you held the shares of the "old" fund will be added to the time you hold the shares of the "new" fund for purposes of determining your CDSC or, in the case of Class B shares, calculating when your shares convert to Class A shares.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
By Phone. If both funds have identical shareholder registrations, you may exchange shares by calling your financial intermediary or by calling the funds directly at 800 677-FUND.
By Mail. To exchange shares by written request, please follow the procedures under "Redeeming Class A, Class B and Class C Shares" above. Be sure to include the names of both funds involved in the exchange.
By Systematic Exchange Plan. You may add to your investment on a regular basis through automatic monthly exchanges of your First American fund into another First American Fund of the same class. You may apply for participation in this program through your financial intermediary or by calling Investor Services at 800 677-FUND.
Purchasing, Redeeming and Exchanging Class R Shares
Eligible retirement plans generally may open an account and purchase Class R shares by contacting any financial intermediary or plan administrator authorized to sell the funds' shares. Participants in retirement plans generally must contact the plan's administrator to purchase, redeem or exchange shares.
Share purchases by eligible retirement plans are generally made by wire transfer. You cannot purchase shares by wire on days when federally chartered banks are closed.
Purchase orders and redemption requests from a retirement plan or participant in
the plan must be received by the financial intermediary or plan administrator by
the time specified by that institution to be assured same day processing. In
order for shares to be purchased at that day's price, the funds must receive the
purchase order from the financial intermediary or plan administrator by 3:00
p.m. Central time. In order for shares to be sold at that day's price, the funds
must receive the redemption request from the financial intermediary or plan
administrator by 3:00 p.m. Central time. It is the responsibility of the
financial intermediary or plan administrator to promptly transmit orders to the
funds.
If the funds receive a redemption request by 3:00 p.m. Central time, payment of the redemption proceeds will ordinarily be made by wire on the next business day. It is possible, however, that payment could be delayed by up to seven days.
Exchanging Class R Shares. If you are a plan participant and your investment goals or your financial needs change, you may exchange your shares for Class R shares of another First American Fund offered through your retirement plan. Exchanges are made at the net asset value per share of each fund at the time of the exchange. There is no fee to exchange shares.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
To exchange your shares, call your financial intermediary or plan administrator. In order for your shares to be exchanged the same day, you must call your financial intermediary or plan administrator by the time specified by that institution and your exchange order must be received by the funds by 3:00 p.m. Central time. It is the responsibility of your financial intermediary or plan administrator to promptly transmit your exchange order to the funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies, or the funds offered through your retirement plan may change, at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
Purchasing, Redeeming and Exchanging Class Y Shares
You may purchase or redeem shares by calling your financial intermediary. When purchasing shares, payment must be made by wire transfer, which can be arranged by your financial intermediary. You cannot purchase shares by wire on days when federally chartered banks are closed. The funds reserve the right to impose minimum investment amounts on clients of financial intermediaries that charge the funds or the advisor transaction or recordkeeping fees.
If the fund or an authorized financial intermediary receives your redemption request by 3:00 p.m. Central time, payment of your redemption proceeds will ordinarily be made by wire on the next business day. It is possible, however, that payment could be delayed by up to seven days.
Exchanging Class Y Shares. If your investment goals or your financial needs change, you may exchange your shares for Class Y shares of another First American Fund. Exchanges are made at the net asset value per share of each fund at the time of the exchange. There is no fee to exchange shares. If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
To exchange your shares, call your financial intermediary.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares "below.
ADDITIONAL INFORMATION ON PURCHASING, REDEEMING AND EXCHANGING SHARES
Calculating Net Asset Value
The funds generally calculate their NAV as of 3:00 p.m. Central time every day the New York Stock Exchange is open.
A fund's NAV is equal to the market value of its investments and other assets, less any liabilities, divided by the number of fund shares. Security valuations for the funds' investments are furnished by one or more independent pricing services that have been approved by the funds' board of directors. If market prices are not readily available for an investment or if the advisor believes they are unreliable, fair value prices may be determined in good faith using procedures approved by the funds' board of directors. Under these procedures, fair values are generally determined by a pricing committee appointed by the board of directors. The types of securities for which such fair value pricing might be required include, but are not limited to:
- Securities, including securities traded in foreign markets, where an event occurs after the close of the market in which such security principally trades, but before NAV is determined, that will affect the value of such security, or the closing value is otherwise deemed unreliable;
- Securities whose trading has been halted or suspended;
- Fixed-income securities that have gone into default and for which there is no current market value quotation; and
- Securities with limited liquidity, including certain high-yield securities or securities that are restricted as to transfer or resale.
Valuing securities at fair value involves greater reliance on judgment than valuing securities that have readily available market quotations. There can be no assurance that a fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its NAV per share.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Short-Term Trading of Fund Shares
The funds discourage purchases and redemptions of their shares in response to short-term fluctuations in the securities markets. The funds' Board of Directors has adopted policies and procedures designed to detect and deter short-term trading in the funds' shares that may disadvantage long-term fund shareholders. These policies are described below. The funds will not knowingly accommodate trading in the funds' shares in violation of these policies. As discussed below, however, there is no guarantee that the funds will be able to detect such trading in all accounts. See "Omnibus Accounts" below. These policies do not apply to purchases and sales of fund shares by other First American Funds.
Risks Associated with Short-Term Trading. Short-term trading in a fund's shares, particularly in larger amounts, may be detrimental to long-term shareholders of the fund. Depending on various factors, including the size of a fund, the amount of assets the fund typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades, and the types of securities in which the fund typically invests, short-term trading may interfere with the efficient management of the fund's portfolio, increase the fund's transaction costs, administrative costs and taxes, and/or impact the fund's performance.
In addition, the nature of a fund's portfolio holdings may allow a shareholder engaging in a short-term trading strategy to take advantage of possible delays between the change in the value of a fund's portfolio holdings and the reflection of that change in the net asset value of the fund's shares. Such a delay may occur in funds that have significant investments in foreign securities, where the value of those securities is established some time before the fund calculates its own share price, or in funds that hold significant investments in small-cap securities, high-yield (junk) bonds and other types of investments that may not be frequently traded. This type of short-term trading is sometimes referred to as "arbitrage market timing," and there is the possibility that such trading may dilute the value of fund shares if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices.
Short-Term Trading Policies. The funds' advisor monitors trading in fund shares in an effort to identify short-term trading activity that may disadvantage long-term shareholders. Only transactions that exceed a certain dollar threshold that has been determined to be potentially disruptive to the management of a fund are subject to monitoring. It is the policy of the funds to permit no more than one round trip by an investor during any 90-calendar-day period. A round trip is defined as a purchase into or redemption out of a fund (including purchases or redemptions accomplished by an exchange) paired with an opposite direction redemption out of or purchase into the same fund within 10 calendar days, in a dollar amount that exceeds the monitoring threshold. If the advisor determines that a shareholder has made more than one round trip during any 90-calendar-day period, the shareholder conducting such trading will, in less serious instances, be given an initial warning to discontinue such trading. In more serious instances (generally involving larger dollar amounts), or in the case of a second violation after an initial warning has been given, the shareholder may be temporarily or permanently barred from making future purchases into one or all of the funds or, alternatively, the funds may limit the amount, number or frequency of any future purchases and/or the method by which the shareholder may request future purchases (including purchases by an exchange or transfer between a fund and any other fund). In addition to the foregoing sanctions, the funds reserve the right to reject any purchase order at any time and for any reason, without prior written notice. The funds also reserve the right to revoke the exchange privileges of any person at any time and for any reason. In making determinations concerning the rejection of purchase orders and the revocation of exchange privileges, and in considering which sanctions to impose, the funds may consider an investor's trading history in any of the First American Funds, in non-First American mutual funds, or in accounts under a person's common ownership or control.
Certain transactions are not subject to the funds' short-term trading policies. These include transactions such as systematic redemptions and purchases; retirement plan contributions, loans and distributions (including hardship withdrawals); purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations; regular portfolio re-balancings in fee-based programs of registered investment advisors, financial planners and registered broker-dealers; and similar transactions.
Omnibus Accounts. Fund shares are frequently held through omnibus account arrangements, whereby a broker-dealer, investment advisor, retirement plan sponsor or other financial intermediary maintains an omnibus account with a fund for trading on behalf of its customers. The funds seek to apply their short-term trading policies and procedures to these omnibus account arrangements and will request that the intermediary provide individual account level detail (or participant level detail in the case of retirement plans) to the funds if more than one round trip in any 90 day period is detected at the omnibus or plan level and such round trips appear to be (a) attributable to an individual shareholder or plan participant and (b) potentially detrimental to the respective fund and its shareholders based on such factors as the time between transactions, the size of the transactions and the type of fund involved. If short-term trading is detected at the individual account or participant level, the funds will request that the financial intermediary take appropriate action to curtail the activity. If the financial intermediary does not take action, the funds will take such steps as are reasonably practicable to curtail the excessive trading, including terminating the relationship with the intermediary if necessary.
PROSPECTUS - First American Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
While the funds will request that financial intermediaries apply the funds' short-term trading policies to their customers who invest indirectly in the funds, the funds are limited in their ability to monitor the trading activity or enforce the funds' short-term trading policies with respect to customers of financial intermediaries. For example, the funds might not be able to detect any short-term trading facilitated by a financial intermediary, if this were to occur.
Telephone Transactions
The funds and their agents will not be responsible for any losses that may result from acting on wire or telephone instructions that they reasonably believe to be genuine. The funds and their agents will each follow reasonable procedures to confirm that instructions received by telephone are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual market activity. If you are unable to reach the funds or their agents by telephone, please consider sending written instructions.
Accounts with Low Balances
If your account balance falls below $500 as a result of redeeming or exchanging shares, the funds reserve the right to either:
- deduct a $50 annual account maintenance fee, or
- close your account and send you the proceeds, less any applicable contingent deferred sales charge.
Before taking any action, however, the funds will send you written notice of the action they intend to take and give you 30 days to re-establish a minimum account balance of $500.
Redemption in Kind
Generally, proceeds from redemption requests will be paid in cash. However, to minimize the effect of large redemption requests on a fund and its remaining shareholders, each fund reserves the right to pay part or all of the proceeds from a redemption request in a proportionate share of securities in the fund instead of cash. In selecting securities for a redemption in kind, the advisor will consider the best interests of the fund and the remaining fund shareholders, and will value these securities in accordance with the pricing methods employed to calculate the fund's net asset value per share. If you receive redemption proceeds in kind, you should expect to incur transaction costs upon disposition of the securities received in the redemption. In addition, you will bear the market risk associated with these securities until their disposition.
PROSPECTUS - First American Income Funds
Policies and Services
Managing Your Investment
STAYING INFORMED
Shareholder Reports
Shareholder reports are mailed twice a year. They include financial statements and performance information, and, on an annual basis, a message from your portfolio managers and the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the funds will try to limit their mailings to one report for each address that lists one or more shareholders with the same last name. If you would like additional copies, please call Investor Services at 800 677-FUND.
Statements and Confirmations
Statements summarizing activity in your account are mailed quarterly. Confirmations are mailed following each purchase or sale of fund shares, but some, such as systematic purchases and dividend reinvestments are reported on your account statement. Generally, the funds do not send statements for shares held in a brokerage account or to individuals who have their shares held in an omnibus account, such as retirement plan participants. Please review your statements and confirmations as soon as you receive them and promptly report any discrepancies to your financial intermediary or to Investor Services at 800 677-FUND.
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared daily and paid monthly. Any capital gains are distributed at least once each year. If the fund receives your wire transfer payment for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on that day. If you place an exchange order for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on the next business day. In the case of shares purchased by check, you will begin to accrue dividends on the first business day after the fund receives your check (provided your check is received by the time the fund determines its NAV).
Dividend and capital gain distributions will be reinvested in additional shares of the fund paying the distribution, unless you request that distributions be reinvested in another First American Fund or paid in cash. This request may be made on your new account form, by contacting your financial intermediary, or by calling Investor Services at 800 677-FUND. If you request that your distributions be paid in cash but those distributions cannot be delivered because of an incorrect mailing address, or if a distribution check remains uncashed for six months, the undelivered or uncashed distributions and all future distributions will be reinvested in fund shares at the current NAV.
TAXES
Some of the tax consequences of investing in the funds are discussed below. More information about taxes is in the SAI. However, because everyone's tax situation is unique, always consult your tax professional about federal, state, and local tax consequences.
Taxes on Distributions
Each fund pays its shareholders dividends from its net investment income and any net capital gains that it has realized. For most investors, fund dividends and distributions are considered taxable whether they are reinvested or taken in cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income and short-term capital gains are taxable as ordinary income. Distributions of a fund's long-term capital gains are taxable as long-term gains, regardless of how long you have held your shares. The funds expect that, as a result of their investment objectives and strategies, their distributions will consist primarily of ordinary income and that the distributions will not be treated as "qualified dividends" that are taxed at the same rates as long-term capital gains.
Taxes on Transactions
The sale of fund shares, or the exchange of one fund's shares for shares of another fund, will be a taxable event and may result in a capital gain or loss. The gain or loss will be considered long-term if you have held your shares for more than one year. A gain or loss on shares held for one year or less is considered short-term and is taxed at the same rates as ordinary income.
PROSPECTUS - First American Income Funds
Managing Your Investment CONTINUED
If in redemption of his or her shares a shareholder receives a distribution of securities instead of cash, the shareholder will be treated as receiving an amount equal to the fair market value of the securities at the time of the distribution for purposes of determining capital gain or loss on the redemption, and will also acquire a basis in the shares for federal income tax purposes equal to their fair market value.
The exchange of one class of shares for another class of shares in the same fund will not be taxable.
Considerations for Retirement Plan Clients
Class R shares are offered only to tax-qualified retirement plans. Thus, Class R shareholders will not be subject to federal income tax on fund dividends or distributions or on sales or exchanges of fund shares. A plan participant whose retirement plan invests in a fund generally is not taxed on fund dividends or distributions received by the plan or on sales or exchanges of fund shares by the plan for federal income tax purposes. However, distributions to plan participants from a retirement plan generally are taxable to plan participants as ordinary income. You should consult your tax professional about federal, state and local tax considerations. More information about tax considerations that may affect the funds and their shareholders appears in the funds' SAI.
PROSPECTUS - First American Income Funds
Additional Information
Management
FAF Advisors, Inc., formerly known as U.S. Bancorp Asset Management, Inc., is the funds' investment advisor. FAF Advisors provides investment management services to individuals and institutions, including corporations, foundations, pensions, and retirement plans. As of June 30, 2006, FAF Advisors and its affiliates had more than $102 billion in assets under management, including investment company assets of more than $65 billion. As investment advisor, FAF Advisors manages the funds' business and investment activities, subject to the authority of the funds' board of directors.
Each fund pays the investment advisor a monthly management fee for providing investment advisory services. The table below reflects management fees paid to the investment advisor, after taking into account any fee waivers, for the funds' most recently completed fiscal period.
Management fee
as a % of average
daily net assets
--------------------------------------------------------
CORE BOND FUND %
HIGH INCOME BOND FUND %
INFLATION PROTECTED SECURITIES FUND %
INTERMEDIATE GOVERNMENT BOND FUND %
INTERMEDIATE TERM BOND FUND %
SHORT TERM BOND FUND %
TOTAL RETURN BOND FUND %
U.S. GOVERNMENT MORTGAGE FUND %
--------------------------------------------------------
|
A discussion regarding the basis for the board of directors' approval of the funds' investment advisory agreement appears in the funds' annual report to shareholders for the fiscal period ended June 30, 2006.
Direct Correspondence to:
First American Funds
P.O. Box 1330
Minneapolis, MN 55440-1330
Investment Advisor
FAF Advisors, Inc.
800 Nicollet Mall
Minneapolis, MN 55402
Distributor
Quasar Distributors, LLC
615 E. Michigan Street
Milwaukee, WI 53202
ADDITIONAL COMPENSATION
FAF Advisors, U.S. Bank National Association (U.S. Bank) and other affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and other trust and agency accounts that invest in the First American Funds. As described above, FAF Advisors receives compensation for acting as the funds' investment advisor. FAF Advisors, U.S. Bank and their affiliates also receive compensation in connection with the following:
Custody Services. U.S. Bank provides custody services to the funds. U.S. Bank is paid monthly fees equal, on an annual basis, to 0.005% of each fund's average daily net assets.
Administration Services. FAF Advisors and its affiliate, U.S. Bancorp Fund Services, LLC (Fund Services), act as the funds' administrator and sub-administrator, respectively, providing administration services that include general administrative and accounting services, blue sky services and shareholder services. For such services, each fund pays FAF Advisors the fund's pro rata portion of up to 0.15% of the aggregate average daily net assets of all open-end funds in the First American family of funds. FAF Advisors pays Fund Services a portion of its fee, as agreed to from time to time. In addition, it receives from the fund 0.10% of the relevant fund's average daily net assets for providing certain shareholder services and to reimburse it for making payments to certain financial institutions that maintain and provide services to omnibus accounts.
Transfer Agency Services. Fund Services provides transfer agency and dividend disbursing services, as well as certain shareholder services, to the funds. Fund Services receives fees for transfer agency and dividend disbursing services based upon the number of share classes and shareholder accounts maintained.
Distribution Services. Quasar Distributors, LLC, an affiliate of FAF Advisors, receives distribution and shareholder servicing fees for acting as the funds' distributor.
Securities Lending Services. In connection with lending their portfolio securities, the funds (other than Intermediate Government Bond Fund) pay fees to FAF Advisors which are equal to 32% of each fund's net income from these securities lending transactions.
Other Compensation. To the extent that fund shares are held through U.S. Bank or its broker-dealer affiliate, U.S. Bancorp Investments, Inc., those entities may receive distribution and/or shareholder servicing fees from the funds' distributor as well as other payments from the funds' distributor and/or advisor as described above under "Policies and Services -- Purchasing and Redeeming Shares -- Additional Payments to Institutions."
PROSPECTUS - First American Income Funds
Additional Information
Management CONTINUED
PORTFOLIO MANAGEMENT
The portfolio managers primarily responsible for the funds' management are set forth below followed by the portfolio managers' biographies.
Core Bond Fund. Chris J. Neuharth has served as the primary portfolio manager for the fund since October 2006 and had previously co-managed the fund since October 2002. Timothy A. Palmer, Wan-Chong Kung, and Jeffrey J. Ebert have co-managed the fund since May 2003, June 2001, and December 2005, respectively.
High Income Bond Fund. John T. Fruit has served as the primary portfolio manager for the fund since October 2006 and had previously co-managed the fund since November 2005. Douglas P. Hedberg and Gregory A. Hanson have co-managed the fund since August 2001 and March 2006, respectively.
Inflation Protected Securities Fund. Wan-Chong Kung has served as the primary portfolio manager for the fund and Linda M. Sauber has co-managed the fund since October 2004.
Intermediate Government Bond Fund. Wan-Chong Kung has served as the primary portfolio manager for the fund since November 2002 and Linda M. Sauber has co-managed the fund since February 2003.
Intermediate Term Bond Fund. Wan-Chong Kung has served as the primary portfolio manager for the fund since October 2002 and Jeffrey J. Ebert has co-managed the fund since February 2000.
Short Term Bond Fund. Chris J. Neuharth has served as the primary portfolio manager for the fund since March 2004 and Marie A. Newcome has co-managed the fund since January 2005.
Total Return Bond Fund. Timothy A. Palmer has served as the primary portfolio manager for the fund since May 2005. Wan-Chong Kung and Chris J. Neuharth have co-managed the fund since May 2005, and Jeffrey J. Ebert has co-managed the fund since February 2000.
U.S. Government Mortgage Fund. Chris J. Neuharth has served as the primary portfolio manager for the fund since September 2001 and Jason J. O'Brien has co-managed the fund since October 2001.
PORTFOLIO MANAGER BIOGRAPHIES
Jeffrey J. Ebert, Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1991 and has 16 years of financial industry experience.
John T. Fruit, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 2001 as a senior credit research analyst. Prior to that, he worked for Aid Association for Lutherans as a fixed-income analyst/trader. He also previously did analysis and institutional trading for Arbor Research and Trading and worked in sales and trading in securities lending and fixed income for that firm. Mr. Fruit has more than 18 years of financial industry experience.
Gregory A. Hanson, CFA, Head of Taxable Fixed-Income Research, joined FAF Advisors in 1997. Mr. Hanson has 29 years of financial industry experience, including 23 years in portfolio management.
Douglas P. Hedberg, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1997 and has 42 years of financial industry experience, including 27 years in portfolio management.
Wan-Chong Kung, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1993 and has 14 years of portfolio management experience.
Chris J. Neuharth, CFA, Senior Fixed-Income Portfolio Manager, rejoined U.S. Bancorp Asset Management in 2000. He has 25 years of financial industry experience, including 21 years in portfolio management.
Marie A. Newcome, CFA, Senior Fixed-Income Portfolio Analyst, joined U.S. Bancorp Asset Management in 2004. Prior to that, Ms. Newcome held multiple positions at American Express Financial Advisors, specializing in government, global, corporate, and mortgage-backed bond portfolios. She has 14 years of financial industry experience.
Jason J. O'Brien, CFA, Senior Fixed-Income Trader, joined U.S. Bancorp Asset Management in 1996 and has 13 years of financial industry experience.
Timothy A. Palmer, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in May 2003. Mr. Palmer was a Senior Fixed-Income Portfolio Manager at American Express Financial Advisors from April 2001 until February 2003. Mr. Palmer has 20 years of financial industry experience, including 17 years in portfolio management.
Linda M. Sauber, Fixed-Income Trader, joined U.S. Bancorp Asset Management in 2003. Prior to that, Ms. Sauber obtained her MBA from the University of St. Thomas after working as a senior fixed-income trader with Advantus Capital Management. She has 18 years of financial industry experience.
The SAI provides additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of securities in the funds.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights
The tables that follow present performance information about the Class A, Class B, Class C, Class R, and Class Y shares of the funds (to the extent the funds offer the various classes). This information is intended to help you understand each fund's financial performance for the past five years or, if shorter, the period of the fund's operations. Some of this information reflects financial results for a single fund share held throughout the period. Total returns in the tables represent the rate that you would have earned or lost on an investment in the fund, excluding sales charges and assuming you reinvested all of your dividends and distributions.
The information below has been derived from the financial statements audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the funds' financial statements, is included in the funds' annual report, which is available upon request.
CORE BOND FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.15 $ 11.27 $ 11.56 $ 11.45 $ 11.37 $ 10.69
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.33 0.40 0.38 0.42 0.55 0.61
Realized and Unrealized Gains (Losses)
on Investments (0.37) (0.09) (0.09) 0.15 0.08 0.69
-------- -------- -------- -------- -------- --------
Total From Investment Operations (0.04) 0.31 0.29 0.57 0.63 1.30
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.33) (0.42) (0.41) (0.46) (0.55) (0.62)
Distributions (from net realized gains) (0.07) (0.01) (0.17) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.40) (0.43) (0.58) (0.46) (0.55) (0.62)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.71 $ 11.15 $ 11.27 $ 11.56 $ 11.45 $ 11.37
======== ======== ======== ======== ======== ========
Total Return(3) (0.34)% 2.75% 2.60% 5.08% 5.77% 12.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $134,845 $161,410 $184,805 $191,754 $122,354 $119,067
Ratio of Expenses to Average Net Assets 0.95% 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to Average
Net Assets 3.98% 3.51% 3.30% 3.58% 4.93% 5.50%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.03% 1.05% 1.05% 1.05% 1.03% 1.13%
Ratio of Net Investment Income to Average
Net Assets
(excluding waivers) 3.90% 3.41% 3.20% 3.48% 4.85% 5.32%
Portfolio Turnover Rate 139% 208% 182% 196% 115% 81%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
CORE BOND FUND (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS B SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.07 $ 11.19 $ 11.48 $ 11.38 $ 11.29 $ 10.63
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.26 0.31 0.29 0.35 0.47 0.52
Realized and Unrealized Gains (Losses) on
Investments (0.36) (0.09) (0.09) 0.12 0.09 0.68
------- ------- ------- ------- ------- -------
Total From Investment Operations (0.10) 0.22 0.20 0.47 0.56 1.20
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.27) (0.33) (0.32) (0.37) (0.47) (0.54)
Distributions (from net realized gains) (0.07) (0.01) (0.17) -- -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.34) (0.34) (0.49) (0.37) (0.47) (0.54)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.63 $ 11.07 $ 11.19 $ 11.48 $ 11.38 $ 11.29
======= ======= ======= ======= ======= =======
Total Return(3) (0.91)% 2.00% 1.83% 4.23% 5.12% 11.59%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $13,819 $17,078 $21,046 $28,096 $16,741 $15,071
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70% 1.70%
Ratio of Net Investment Income to Average Net
Assets 3.23% 2.76% 2.58% 2.83% 4.17% 4.75%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.78% 1.80% 1.80% 1.80% 1.78% 1.88%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.15% 2.66% 2.48% 2.73% 4.09% 4.57%
Portfolio Turnover Rate 139% 208% 182% 196% 115% 81%
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|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.12 $11.24 $11.53 $ 11.42 $11.34 $10.66
------ ------ ------ ------- ------ ------
Investment Operations:
Net Investment Income 0.26 0.31 0.29 0.34 0.47 0.52
Realized and Unrealized Gains (Losses) on
Investments (0.37) (0.09) (0.09) 0.14 0.08 0.70
------ ------ ------ ------- ------ ------
Total From Investment Operations (0.11) 0.22 0.20 0.48 0.55 1.22
------ ------ ------ ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.27) (0.33) (0.32) (0.37) (0.47) (0.54)
Distributions (from net realized gains) (0.07) (0.01) (0.17) -- -- --
------ ------ ------ ------- ------ ------
Total Distributions (0.34) (0.34) (0.49) (0.37) (0.47) (0.54)
------ ------ ------ ------- ------ ------
Net Asset Value, End of Period $10.67 $11.12 $11.24 $ 11.53 $11.42 $11.34
====== ====== ====== ======= ====== ======
Total Return(3) (1.01)% 1.99% 1.81% 4.30% 5.02% 11.68%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,183 $7,266 $9,132 $13,424 $9,672 $7,148
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70% 1.70%
Ratio of Net Investment Income to Average Net
Assets 3.22% 2.76% 2.58% 2.85% 4.18% 4.65%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.78% 1.80% 1.80% 1.80% 1.78% 1.88%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.14% 2.66% 2.48% 2.75% 4.10% 4.47%
Portfolio Turnover Rate 139% 208% 182% 196% 115% 81%
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|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
CORE BOND FUND(1) (CONTINUED)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS R SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.17 $11.30 $11.56 $ 11.45 $ 11.37 $ 11.28
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.31 0.38 0.38 0.42 0.55 0.01
Realized and Unrealized Gains (Losses)
on Investments (0.36) (0.10) (0.10) 0.15 0.08 0.08
------ ------ ------ ------- ------- -------
Total From Investment Operations (0.05) 0.28 0.28 0.57 0.63 0.09
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.32) (0.40) (0.37) (0.46) (0.55) --
Distributions (from net realized gains) (0.07) (0.01) (0.17) -- -- --
------ ------ ------ ------- ------- -------
Total Distributions (0.39) (0.41) (0.54) (0.46) (0.55) --
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.73 $11.17 $11.30 $ 11.56 $ 11.45 $ 11.37
====== ====== ====== ======= ======= =======
Total Return(5) (0.51)% 2.51% 2.53% 5.08% 5.77% 0.80%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 34 $ 16 $ 1 $39,236 $33,270 $35,062
Ratio of Expenses to Average Net Assets 1.20% 1.20% 0.95% 0.95% 0.95% 1.58%
Ratio of Net Investment Income to
Average Net Assets 3.77% 3.37% 3.37% 3.58% 4.93% 6.36%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.43% 1.45% 1.05% 1.05% 1.03% 1.76%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.54% 3.12% 3.27% 3.48% 4.85% 6.18%
Portfolio Turnover Rate 139% 208% 182% 196% 115% 81%
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|
(1)Prior to July 1, 2004, Class R shares were named Class S shares, which had lower fees and expenses.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Class of shares has been offered since September 24, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of
Period $ 11.15 $ 11.27 $ 11.56 $ 11.45 $ 11.37 $ 10.69
---------- ---------- ---------- ---------- ---------- ----------
Investment Operations:
Net Investment Income 0.35 0.42 0.40 0.45 0.58 0.63
Realized and Unrealized Gains
(Losses) on Investments (0.38) (0.08) (0.08) 0.15 0.08 0.70
---------- ---------- ---------- ---------- ---------- ----------
Total From Investment
Operations (0.03) 0.34 0.32 0.60 0.66 1.33
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends (from net investment
income) (0.35) (0.45) (0.44) (0.49) (0.58) (0.65)
Distributions (from net
realized gains) (0.07) (0.01) (0.17) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (0.42) (0.46) (0.61) (0.49) (0.58) (0.65)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $ 10.70 $ 11.15 $ 11.27 $ 11.56 $ 11.45 $ 11.37
========== ========== ========== ========== ========== ==========
Total Return(3) (0.24)% 3.01% 2.87% 5.34% 6.04% 12.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,680,105 $1,725,850 $1,740,470 $1,955,909 $1,204,555 $1,368,812
Ratio of Expenses to Average
Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income
to Average Net Assets 4.24% 3.77% 3.58% 3.83% 5.18% 5.76%
Ratio of Expenses to Average
Net Assets (excluding waivers) 0.78% 0.80% 0.80% 0.80% 0.78% 0.88%
Ratio of Net Investment Income
to Average Net Assets
(excluding waivers) 4.16% 3.67% 3.48% 3.73% 5.10% 5.58%
Portfolio Turnover Rate 139% 208% 182% 196% 115% 81%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
HIGH INCOME BOND FUND(1)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS A SHARES June 30, 2006(2) 2005(3) 2004(3) 2003(3) 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.41 $ 9.45 $ 9.13 $ 7.90 $ 9.23 $ 9.93
-------- ------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.49 0.66 0.68 0.68 0.65 0.02
Realized and Unrealized Gains (Losses)
on Investments (0.20) (0.04) 0.32 1.24 (1.21) (0.68)
-------- ------- ------- ------- ------- ------
Total From Investment Operations 0.29 0.62 1.00 1.92 (0.56) (0.66)
-------- ------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.48) (0.66) (0.68) (0.69) (0.70) (0.04)
Distributions (from return of capital) -- --(5) -- -- (0.07) --
-------- ------- ------- ------- ------- ------
Total Distributions (0.48) (0.66) (0.68) (0.69) (0.77) (0.04)
-------- ------- ------- ------- ------- ------
Net Asset Value, End of Period $ 9.22 $ 9.41 $ 9.45 $ 9.13 $ 7.90 $ 9.23
======== ======= ======= ======= ======= ======
Total Return(6) 3.14% 6.74% 11.30% 25.30% (6.66)% (6.55)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 29,573 $34,144 $43,842 $42,013 $23,900 $ 161
Ratio of Expenses to Average Net Assets 1.10% 1.02% 1.00% 1.06% 1.10% 1.10%
Ratio of Net Investment Income to
Average Net Assets 6.94% 6.88% 7.25% 7.72% 7.64% 6.53%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.29% 1.27% 1.26% 1.24% 1.47% 1.33%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 6.75% 6.63% 6.99% 7.54% 7.27% 6.30%
Portfolio Turnover Rate 68% 77% 80% 122% 86% 53%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to March 17, 2003 are those of the First American High Yield Bond Fund, which merged into the High Income Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Commenced operations on August 30, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Includes a tax return of capital of less than $0.01.
(6)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS B SHARES June 30, 2006(2) 2005(3) 2004(3) 2003(3) 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.37 $ 9.41 $ 9.09 $ 7.87 $ 9.19 $ 9.88
-------- ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.43 0.58 0.61 0.61 0.69 0.02
Realized and Unrealized Gains (Losses)
on Investments (0.19) (0.03) 0.32 1.24 (1.31) (0.67)
-------- ------ ------ ------ ------ ------
Total From Investment Operations 0.24 0.55 0.93 1.85 (0.62) (0.65)
-------- ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.43) (0.59) (0.61) (0.63) (0.63) (0.04)
Distributions (from return of capital) -- --(5) -- -- (0.07) --
-------- ------ ------ ------ ------ ------
Total Distributions (0.43) (0.59) (0.61) (0.63) (0.70) (0.04)
-------- ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.18 $ 9.37 $ 9.41 $ 9.09 $ 7.87 $ 9.19
======== ====== ====== ====== ====== ======
Total Return(6) 2.57% 5.97% 10.52% 24.33% (7.26)% (6.47)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 5,988 $7,191 $8,521 $8,939 $ 774 $ 40
Ratio of Expenses to Average Net Assets 1.85% 1.77% 1.75% 1.81% 1.80% 1.77%
Ratio of Net Investment Income to Average
Net Assets 6.19% 6.13% 6.50% 7.00% 7.49% 6.02%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.04% 2.02% 2.01% 1.99% 2.28% 2.02%
Ratio of Net Investment Income to Average
Net Assets
(excluding waivers) 6.00% 5.88% 6.24% 6.82% 7.01% 5.77%
Portfolio Turnover Rate 68% 77% 80% 122% 86% 53%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to March 17, 2003 are those of the First American High Yield Bond Fund, which merged into the High Income Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Commenced operations on August 30, 2001. All ratios for the period have been
annualized, except total return and portfolio turnover.
(5)Includes a tax return of capital of less than $0.01.
(6)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
HIGH INCOME BOND FUND(1) (CONTINUED)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS C SHARES June 30, 2006(2) 2005(3) 2004(3) 2003(3) 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.38 $ 9.42 $ 9.10 $ 7.89 $ 9.21 $ 9.90
-------- ------- ------- ------- ------ ------
Investment Operations:
Net Investment Income 0.43 0.58 0.61 0.61 0.64 0.05
Realized and Unrealized Gains (Losses)
on Investments (0.19) (0.03) 0.32 1.23 (1.27) (0.70)
-------- ------- ------- ------- ------ ------
Total From Investment Operations 0.24 0.55 0.93 1.84 (0.63) (0.65)
-------- ------- ------- ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.43) (0.59) (0.61) (0.63) (0.62) (0.04)
Distributions (from return of capital) -- --(5) -- -- (0.07) --
-------- ------- ------- ------- ------ ------
Total Distributions (0.43) (0.59) (0.61) (0.63) (0.69) (0.04)
-------- ------- ------- ------- ------ ------
Net Asset Value, End of Period $ 9.19 $ 9.38 $ 9.42 $ 9.10 $ 7.89 $ 9.21
======== ======= ======= ======= ====== ======
Total Return(6) 2.56% 5.96% 10.51% 24.14% (7.34)% (6.50)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 9,873 $13,403 $17,349 $19,685 $7,213 $3,749
Ratio of Expenses to Average Net Assets 1.85% 1.77% 1.75% 1.80% 1.83% 1.94%
Ratio of Net Investment Income to Average
Net Assets 6.19% 6.13% 6.50% 7.01% 7.08% 5.53%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.04% 2.02% 2.01% 1.98% 2.26% 2.21%
Ratio of Net Investment Income to Average
Net Assets
(excluding waivers) 6.00% 5.88% 6.24% 6.83% 6.65% 5.26%
Portfolio Turnover Rate 68% 77% 80% 122% 86% 53%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to March 17, 2003 are those of the First American High Yield Bond Fund, which merged into the High Income Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Commenced operations on August 30, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Includes a tax return of capital of less than $0.01.
(6)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
HIGH INCOME BOND FUND(1,2) (CONTINUED)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS R SHARES June 30, 2006(3) 2005(4) 2004(4) 2003(4) 2002 2001(4,5)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.53 $ 9.60 $ 9.21 $ 7.98 $ 9.32 $ 9.50
-------- ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.49 0.62 0.69 0.71 0.73 0.01
Realized and Unrealized Gains (Losses)
on Investments (0.20) (0.04) 0.32 1.22 (1.30) (0.19)
-------- ------ ------ ------ ------ ------
Total From Investment Operations 0.29 0.58 1.01 1.93 (0.57) (0.18)
-------- ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.47) (0.65) (0.62) (0.70) (0.70) --
Distributions (from return of capital) -- --(6) -- -- (0.07) --
-------- ------ ------ ------ ------ ------
Total Distributions (0.47) (0.65) (0.62) (0.70) (0.77) --
-------- ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.35 $ 9.53 $ 9.60 $ 9.21 $ 7.98 $ 9.32
======== ====== ====== ====== ====== ======
Total Return(7) 3.09% 6.23% 11.29% 25.11% (6.66)% (1.90)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 73 $ 4 $ 1 $ 777 $ 87 $ --
Ratio of Expenses to Average Net Assets 1.35% 1.33% 1.00% 1.00% 1.01% --
Ratio of Net Investment Income to Average
Net Assets 6.82% 6.31% 7.33% 7.86% 8.46% 1.23%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.69% 1.73% 1.26% 1.18% 1.57% --
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 6.48% 5.91% 7.07% 7.68% 7.90% 1.23%
Portfolio Turnover Rate 68% 77% 80% 122% 86% 53%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to March 17, 2003 are those of the First American High Yield Bond Fund, which merged into High Income Bond Fund on that date.
(2)Prior to July 1, 2004, Class R shares were named Class S shares, which had lower fees and expenses.
(3)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Per share data calculated using average shares outstanding method.
(5)Class of shares has been offered since September 24, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(6)Includes a tax return of capital of less than $0.01.
(7)Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(2) 2005(3) 2004(3) 2003(3) 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.42 $ 9.46 $ 9.13 $ 7.92 $ 9.24 $ 9.92
-------- -------- -------- -------- ------- ------
Investment Operations:
Net Investment Income 0.51 0.68 0.70 0.69 0.74 0.05
Realized and Unrealized Gains (Losses)
on Investments (0.20) (0.03) 0.34 1.24 (1.28) (0.69)
-------- -------- -------- -------- ------- ------
Total From Investment Operations 0.31 0.65 1.04 1.93 (0.54) (0.64)
-------- -------- -------- -------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.50) (0.69) (0.71) (0.72) (0.71) (0.04)
Distributions (from return of capital) -- --(5) -- -- (0.07)
-------- -------- -------- -------- ------- ------
Total Distributions (0.50) (0.69) (0.71) -- (0.78) (0.04)
-------- -------- -------- -------- ------- ------
Net Asset Value, End of Period $ 9.23 $ 9.42 $ 9.46 $ 9.13 $ 7.92 $ 9.24
======== ======== ======== ======== ======= ======
Total Return(6) 3.34% 7.01% 11.69% 25.29% (6.33)% (6.47)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $205,382 $207,610 $234,770 $179,416 $21,157 $8,308
Ratio of Expenses to Average Net Assets 0.85% 0.77% 0.75% 0.83% 0.82% 0.96%
Ratio of Net Investment Income to Average
Net Assets 7.19% 7.13% 7.49% 7.97% 8.19% 6.06%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.04% 1.02% 1.01% 1.01% 1.27% 1.23%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 7.00% 6.88% 7.23% 7.79% 7.74% 5.79%
Portfolio Turnover Rate 68% 77% 80% 122% 86% 53%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to March 17, 2003 are those of the First American High Yield Bond Fund, which merged into the High Income Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Commenced operations on August 30, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Includes a tax return of capital of less than $0.01.
(6)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
INFLATION PROTECTED SECURITIES FUND
Fiscal year
Fiscal period ended
ended September 30,
CLASS A SHARES June 30, 2006(1) 2005(2,3)
------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.12 $10.00
------ ------
Investment Operations:
Net Investment Income 0.38 0.51
Realized and Unrealized Losses on Investments (0.55) (0.02)
------ ------
Total From Investment Operations (0.17) 0.49
------ ------
Less Distributions:
Dividends (from net investment income) (0.40) (0.37)
Distributions (from net realized gains) (0.01) --
------ ------
Total Distributions (0.41) (0.37)
------ ------
Net Asset Value, End of Period $ 9.54 $10.12
====== ======
Total Return(4) (1.69)% 4.93%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,042 $6,917
Ratio of Expenses to Average Net Assets 0.85% 0.85%
Ratio of Net Investment Income to Average Net Assets 5.20% 5.04%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.08% 1.09%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 4.97% 4.80%
Portfolio Turnover Rate 85% 23%
------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 1, 2004.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal year
Fiscal period ended
ended September 30,
CLASS C SHARES June 30, 2006(1) 2005(2,3)
---------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.11 $10.00
------ ------
Investment Operations:
Net Investment Income 0.31 0.40
Realized and Unrealized Gains on Investments (0.53) 0.02
------ ------
Total From Investment Operations (0.22) 0.42
------ ------
Less Distributions:
Dividends (from net investment income) (0.35) (0.31)
Distributions (from net realized gains) (0.01) --
------ ------
Total Distributions (0.36) (0.31)
------ ------
Net Asset Value, End of Period $ 9.53 $10.11
====== ======
Total Return(4) (2.26)% 4.18%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 552 $ 855
Ratio of Expenses to Average Net Assets 1.60% 1.60%
Ratio of Net Investment Income to Average Net Assets 4.29% 3.98%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.83% 1.84%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 4.06% 3.74%
Portfolio Turnover Rate 85% 23%
---------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 1, 2004.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
INFLATION PROTECTED SECURITIES FUND (CONTINUED)
Fiscal year
Fiscal Period ended
ended September 30,
CLASS R SHARES June 30, 2006(1) 2001(2,3)
-----------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.13 $10.00
------ ------
Investment Operations:
Net Investment Income 0.38 0.43
Realized and Unrealized Gains on Investments (0.56) 0.05
------ ------
Total From Investment Operations (0.18) 0.48
------ ------
Less Distributions:
Dividends (from net investment income) (0.39) (0.35)
Distributions (from net realized gains) (0.01) --
------ ------
Total Distributions (0.40) (0.35)
------ ------
Net Asset Value, End of Period $ 9.55 $10.13
====== ======
Total Return(4) (1.80)% 4.81%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 1 $ 1
Ratio of Expenses to Average Net Assets 1.10% 1.10%
Ratio of Net Investment Income to Average Net Assets 5.17% 4.22%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.48% 1.49%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 4.79% 3.83%
Portfolio Turnover Rate 85% 23%
-----------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 1, 2004.
(4)Total return would have been lower had certain expenses not been waived.
Fiscal year
Fiscal period ended
ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005(2,3)
------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.13 $ 10.00
-------- --------
Investment Operations:
Net Investment Income 0.42 0.51
Realized and Unrealized Gains on Investments (0.57) 0.01
-------- --------
Total From Investment Operations (0.15) 0.52
-------- --------
Less Distributions:
Dividends (from net investment income) (0.42) (0.39)
Distributions (from net realized gains) (0.01) --
-------- --------
Total Distributions (0.43) (0.39)
-------- --------
Net Asset Value, End of Period $ 9.55 $ 10.13
======== ========
Total Return(4) (1.50)% 5.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $317,977 $269,412
Ratio of Expenses to Average Net Assets 0.60% 0.60%
Ratio of Net Investment Income to Average Net Assets 5.73% 5.05%
Ratio of Expenses to Average Net Assets (excluding waivers) 0.83% 0.84%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 5.50% 4.81%
Portfolio Turnover Rate 85% 23%
------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 1, 2004.
(4)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
INTERMEDIATE GOVERNMENT BOND FUND
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS A SHARES June 30, 2006(1) 2005(2) 2004(2) 2003(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 8.26 $ 8.82 $10.01 $10.00
------ ------ ------ ------
Investment Operations:
Net Investment Income 0.22 0.27 0.24 0.32
Realized and Unrealized Gains (Losses) on Investments (0.22) (0.15) (0.16) 0.02
------ ------ ------ ------
Total From Investment Operations 0.00 0.12 0.08 0.34
------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.22) (0.28) (0.24) (0.33)
Distributions (from net realized gains) (0.05) (0.40) (1.03) --
------ ------ ------ ------
Total Distributions (0.27) (0.68) (1.27) (0.33)
------ ------ ------ ------
Net Asset Value, End of Period $ 7.99 $ 8.26 $ 8.82 $10.01
====== ====== ====== ======
Total Return(4) 0.06% 1.40% 0.98% 3.53%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,689 $1,970 $1,872 $2,502
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net Assets 3.56% 3.21% 2.69% 3.22%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.26% 1.09% 1.03% 1.05%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.05% 2.87% 2.41% 2.92%
Portfolio Turnover Rate 70% 161% 53% 74%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 and June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 25, 2002. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period Fiscal year
Fiscal period ended ended
ended September 30, September 30,
CLASS Y SHARES June 30, 2006(1) 2005(2) 2004(2) 2003(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 8.25 $ 8.82 $ 10.01 $ 10.00
------- ------- -------- --------
Investment Operations:
Net Investment Income 0.22 0.28 0.26 0.34
Realized and Unrealized Gains (Losses) on Investments (0.20) (0.16) (0.17) 0.01
------- ------- -------- --------
Total From Investment Operations 0.02 0.12 0.09 0.35
------- ------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.23) (0.29) (0.25) (0.34)
Distributions (from net realized gains) (0.05) (0.40) (1.03) --
------- ------- -------- --------
Total Distributions (0.28) (0.69) (1.28) (0.34)
------- ------- -------- --------
Net Asset Value, End of Period $ 7.99 $ 8.25 $ 8.82 $ 10.01
======= ======= ======== ========
Total Return(4) 0.30% 1.43% 1.14% 3.64%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $42,781 $69,349 $129,769 $334,869
Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60%
Ratio of Net Investment Income to Average Net Assets 3.70% 3.34% 2.84% 3.68%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.01% 0.84% 0.78% 0.80%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.29% 3.10% 2.66% 3.48%
Portfolio Turnover Rate 70% 161% 53% 74%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Commenced operations on October 25, 2002. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
INTERMEDIATE TERM BOND FUND(1)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS A SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.99 $ 10.25 $ 10.46 $ 10.35 $ 10.26 $ 9.70
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.29 0.34 0.31 0.39 0.50 0.54
Realized and Unrealized Gains (Losses)
on Investments (0.27) (0.17) (0.10) 0.12 0.10 0.55
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.02 0.17 0.21 0.51 0.60 1.09
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.30) (0.33) (0.31) (0.40) (0.50) (0.51)
Distributions (from net realized gains) (0.03) (0.10) (0.11) -- -- (0.02)
Distributions (from return of capital) -- -- -- -- (0.01) --
------- ------- ------- ------- ------- -------
Total Distributions (0.33) (0.43) (0.42) (0.40) (0.51) (0.53)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 9.68 $ 9.99 $ 10.25 $ 10.46 $ 10.35 $ 10.26
======= ======= ======= ======= ======= =======
Total Return(5) 0.23% 1.69% 2.06% 5.09% 6.11% 11.46%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $38,296 $48,426 $63,219 $78,682 $65,291 $61,225
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.85%
Ratio of Net Investment Income to
Average Net Assets 3.88% 3.39% 2.97% 3.89% 4.96% 5.62%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.03% 1.05% 1.04% 1.05% 1.02% 0.96%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.60% 3.09% 2.68% 3.59% 4.69% 5.51%
Portfolio Turnover Rate 113% 118% 169% 133% 40% 30%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar Intermediate Bond Fund, which merged into the Intermediate Term Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 and June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end changed from October 31 to September 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS Y SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.96 $ 10.22 $ 10.43 $ 10.32 $ 10.23 $ 9.68
-------- ---------- ---------- ---------- -------- --------
Investment Operations:
Net Investment Income 0.30 0.36 0.33 0.41 0.52 0.56
Realized and Unrealized Gains (Losses)
on Investments (0.27) (0.17) (0.11) 0.12 0.10 0.54
-------- ---------- ---------- ---------- -------- --------
Total From Investment Operations 0.03 0.19 0.22 0.53 0.62 1.10
-------- ---------- ---------- ---------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.31) (0.35) (0.32) (0.42) (0.52) (0.53)
Distributions (from net realized gains) (0.03) (0.10) (0.11) -- -- (0.02)
Distributions (from return of capital) -- -- -- -- (0.01) --
-------- ---------- ---------- ---------- -------- --------
Total Distributions (0.34) (0.45) (0.43) (0.42) (0.53) (0.55)
-------- ---------- ---------- ---------- -------- --------
Net Asset Value, End of Period $ 9.65 $ 9.96 $ 10.22 $ 10.43 $ 10.32 $ 10.23
======== ========== ========== ========== ======== ========
Total Return(5) 0.34% 1.85% 2.22% 5.25% 6.29% 11.61%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $899,175 $1,074,624 $1,219,707 $1,296,529 $978,406 $878,695
Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of Net Investment Income to
Average Net Assets 4.03% 3.55% 3.12% 4.05% 5.11% 5.83%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.78% 0.80% 0.79% 0.80% 0.77% 0.70%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.85% 3.35% 2.93% 3.85% 4.94% 5.73%
Portfolio Turnover Rate 113% 118% 169% 133% 40% 30%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar Intermediate Bond Fund, which merged into the Intermediate Term Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed to September 30 from October 31. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
SHORT TERM BOND FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.93 $ 10.11 $ 10.26 $ 10.29 $ 10.27 $ 9.91
-------- ------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.23 0.27 0.23 0.28 0.42 0.61
Realized and Unrealized Gains (Losses) on
Investments (0.06) (0.16) (0.15) (0.01) 0.04 0.40
-------- ------- -------- -------- -------- --------
Total From Investment Operations 0.17 0.11 0.08 0.27 0.46 1.01
-------- ------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.27) (0.29) (0.23) (0.30) (0.43) (0.65)
Distributions (from return of capital) -- --(3) -- -- (0.01) --
-------- ------- -------- -------- -------- --------
Total Distributions (0.27) (0.29) (0.23) (0.30) (0.44) (0.65)
-------- ------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.83 $ 9.93 $ 10.11 $ 10.26 $ 10.29 $ 10.27
======== ======= ======== ======== ======== ========
Total Return(4) 1.75% 1.08% 0.76% 2.71% 4.59% 10.48%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 78,771 $97,863 $130,531 $159,451 $163,358 $133,177
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.60%
Ratio of Net Investment Income to Average Net
Assets 3.11% 2.68% 2.28% 2.75% 4.06% 6.04%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.04% 1.05% 1.05% 1.05% 1.04% 1.15%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.82% 2.38% 1.98% 2.45% 3.77% 5.49%
Portfolio Turnover Rate 60% 64% 89% 60% 59% 69%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Includes a tax return of capital of less than $0.01.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.93 $ 10.11 $ 10.26 $ 10.30 $ 10.27 $ 9.91
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.24 0.28 0.25 0.30 0.43 0.63
Realized and Unrealized Gains (Losses) on
Investments (0.06) (0.16) (0.16) (0.02) 0.05 0.39
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.18 0.12 0.09 0.28 0.48 1.02
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.28) (0.29) (0.24) (0.32) (0.44) (0.66)
Distributions (from return of capital) -- (0.01) -- -- (0.01) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.28) (0.30) (0.24) (0.32) (0.45) (0.66)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.83 $ 9.93 $ 10.11 $ 10.26 $ 10.30 $ 10.27
======== ======== ======== ======== ======== ========
Total Return(3) 1.87% 1.23% 0.91% 2.76% 4.85% 10.64%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $454,665 $625,392 $943,181 $832,266 $484,583 $277,244
Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60% 0.60% 0.46%
Ratio of Net Investment Income to Average Net
Assets 3.26% 2.83% 2.43% 2.84% 4.18% 6.24%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.79% 0.80% 0.80% 0.80% 0.79% 1.02%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.07% 2.63% 2.23% 2.64% 3.99% 5.68%
Portfolio Turnover Rate 60% 64% 89% 60% 59% 69%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
TOTAL RETURN BOND FUND(1)
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.18 $ 10.25 $ 10.23 $ 9.60 $10.01 $10.03
------- ------- ------- ------- ------ ------
Investment Operations:
Net Investment Income 0.31 0.43 0.46 0.51 0.57 0.72
Realized and Unrealized Gains (Losses) on
Investments (0.33) (0.07) 0.03 0.63 (0.39) 0.35
------- ------- ------- ------- ------ ------
Total From Investment Operations (0.02) 0.36 0.49 1.14 0.18 1.07
------- ------- ------- ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.43) (0.47) (0.51) (0.58) (0.73)
Distributions (from net realized gains) -- -- -- -- (0.01) (0.36)
Distributions (from return of capital) -- -- --(4) -- -- --
------- ------- ------- ------- ------ ------
Total Distributions (0.30) (0.43) (0.47) (0.51) (0.59) (1.09)
------- ------- ------- ------- ------ ------
Net Asset Value, End of Period $ 9.86 $ 10.18 $ 10.25 $ 10.23 $ 9.60 $10.01
======= ======= ======= ======= ====== ======
Total Return(5) (0.17)% 3.57% 4.89% 12.26% 1.83% 10.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $15,522 $19,113 $21,034 $13,522 $8,663 $9,820
Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 1.00% 0.75%
Ratio of Net Investment Income to Average Net Assets 4.14% 4.20% 4.54% 5.15% 5.77% 6.95%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.17% 1.25% 1.25% 1.26% 1.27% 1.20%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.97% 3.95% 4.29% 4.89% 5.50% 6.50%
Portfolio Turnover Rate 166% 285% 132% 91% 117% 187%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Prior to May 13, 2005, the fund had different principal investment strategies and was named Corporate Bond Fund.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Includes a tax return of capital of less than $0.01.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS B SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.14 $10.21 $10.20 $ 9.57 $ 9.98 $ 10.02
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.25 0.35 0.39 0.44 0.49 0.66
Realized and Unrealized Gains (Losses) on
Investments (0.32) (0.07) 0.01 0.63 (0.38) 0.32
------ ------ ------ ------- ------- -------
Total From Investment Operations (0.07) 0.28 0.40 1.07 0.11 0.98
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.25) (0.35) (0.39) (0.44) (0.51) (0.66)
Distributions (from net realized gains) -- -- -- -- (0.01) (0.36)
Distributions (from return of capital) -- -- --(4) -- -- --
------ ------ ------ ------- ------- -------
Total Distributions (0.25) (0.35) (0.39) (0.44) (0.52) (1.02)
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $ 9.82 $10.14 $10.21 $ 10.20 $ 9.57 $ 9.98
====== ====== ====== ======= ======= =======
Total Return(5) (0.74)% 2.81% 3.97% 11.46% 1.07% 10.06%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $3,657 $4,395 $5,474 $13,576 $18,728 $22,608
Ratio of Expenses to Average Net Assets 1.75% 1.75% 1.75% 1.75% 1.75% 1.65%
Ratio of Net Investment Income to Average Net
Assets 3.40% 3.45% 3.83% 4.46% 5.02% 6.45%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.92% 2.00% 2.00% 2.01% 2.02% 2.11%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.23% 3.20% 3.58% 4.20% 4.75% 5.99%
Portfolio Turnover Rate 166% 285% 132% 91% 117% 187%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Prior to May 13, 2005, the fund had different principal investment strategies and was named Corporate Bond Fund.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Includes a tax return of capital of less than $0.01.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
TOTAL RETURN BOND FUND(1) (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.12 $10.20 $10.18 $ 9.55 $ 9.97 $10.01
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.25 0.35 0.39 0.44 0.49 0.63
Realized and Unrealized Gains (Losses) on
Investments (0.32) (0.07) 0.02 0.63 (0.40) 0.35
------ ------ ------ ------ ------ ------
Total From Investment Operations (0.07) 0.28 0.41 1.07 0.09 0.98
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.25) (0.36) (0.39) (0.44) (0.50) (0.66)
Distributions (from net realized gains) -- -- -- -- (0.01) (0.36)
Distributions (from return of capital) -- -- --(4) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.25) (0.36) (0.39) (0.44) (0.51) (1.02)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.80 $10.12 $10.20 $10.18 $ 9.55 $ 9.97
====== ====== ====== ====== ====== ======
Total Return(5) (0.74)% 2.71% 4.11% 11.50% 0.98% 10.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,501 $2,858 $3,789 $5,752 $5,283 $5,209
Ratio of Expenses to Average Net Assets 1.75% 1.75% 1.75% 1.75% 1.75% 1.50%
Ratio of Net Investment Income to Average Net Assets 3.40% 3.46% 3.81% 4.43% 5.02% 6.07%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.92% 2.00% 2.00% 2.01% 2.02% 1.94%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.23% 3.21% 3.56% 4.17% 4.75% 5.63%
Portfolio Turnover Rate 166% 285% 132% 91% 117% 187%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Prior to May 13, 2005, the fund had different principal investment strategies and was named Corporate Bond Fund.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Includes a tax return of capital of less than $0.01.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS R SHARES June 30, 2006(3) 2005(4) 2004(4) 2003 2002 2001(4,5)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.23 $10.29 $10.23 $ 9.60 $10.01 $ 9.93
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.30 0.41 0.48 0.51 0.56 0.01
Realized and Unrealized Gains on
Investments (0.34) (0.07) -- 0.63 (0.38) 0.07
------ ------ ------ ------ ------ ------
Total From Investment Operations (0.04) 0.34 0.48 1.14 0.18 0.08
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.29) (0.40) (0.42) (0.51) (0.58) --
Distributions (from net realized gains) -- -- -- -- (0.01) --
Distributions net realized gains -- -- --(6) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.29) (0.40) (0.42) (0.51) (0.59) --
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.90 $10.23 $10.29 $10.23 $ 9.60 $10.01
====== ====== ====== ====== ====== ======
Total Return(7) (0.44)% 4.81% 4.83% 12.25% 1.84% 0.81%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 14 $ 3 $ 1 $2,668 $3,557 $3,237
Ratio of Expenses to Average Net Assets 1.25% 1.25% 1.00% 1.00% 1.00% 0.89%
Ratio of Net Investment Income to Average
Net Assets 4.05% 3.98% 4.64% 5.21% 5.77% 7.60%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.57% 1.65% 1.25% 1.26% 1.27% 1.36%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.73% 3.58% 4.39% 4.95% 5.50% 7.13%
Portfolio Turnover Rate 166% 285% 132% 91% 117% 187%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Prior to May 13, 2005, the fund had different principal investment strategies and was named Corporate Bond Fund.
(2)Prior to July 1, 2004, Class R shares were named Class S shares, which had lower fees and expenses.
(3)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Per share data calculated using average shares outstanding method.
(5)Class of shares has been offered since September 24, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(6)Includes a tax return of capital of less than $0.01.
(7)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
TOTAL RETURN BOND FUND(1)
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.17 $ 10.24 $ 10.23 $ 9.59 $ 10.00 $ 10.03
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.33 0.46 0.49 0.54 0.59 0.75
Realized and Unrealized Gains (Losses) on
Investments (0.33) (0.07) 0.01 0.64 (0.39) 0.33
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.00 0.39 0.50 1.18 0.20 1.08
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.32) (0.46) (0.49) (0.54) (0.60) (0.75)
Distributions (from net realized gains) -- -- -- -- (0.01) (0.36)
Distributions (from return of capital) -- -- --(4) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.32) (0.46) (0.49) (0.54) (0.61) (1.11)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.85 $ 10.17 $ 10.24 $ 10.23 $ 9.59 $ 10.00
======== ======== ======== ======== ======== ========
Total Return(5) 0.02% 3.83% 5.05% 12.65% 2.08% 11.09%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $378,338 $278,777 $243,018 $245,877 $204,801 $185,392
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.51%
Ratio of Net Investment Income to Average Net
Assets 4.43% 4.43% 4.80% 5.42% 6.03% 7.26%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.92% 1.00% 1.00% 1.01% 1.02% 0.95%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 4.26% 4.18% 4.55% 5.16% 5.76% 6.82%
Portfolio Turnover Rate 166% 285% 132% 91% 117% 187%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to May 13, 2005 are those of the Core Bond Fund, which changed its principal investment strategies and changed its name to Total Return Bond Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)Includes a tax return of capital of less than $0.01.
(5)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
U.S. GOVERNMENT MORTGAGE FUND(1)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS A SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.53 $ 10.72 $ 10.89 $ 11.16 $ 11.01 $10.44
------- ------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.33 0.41 0.38 0.35 0.50 0.51
Realized and Unrealized Gains (Losses) on
Investments (0.32) (0.14) (0.09) (0.05) 0.20 0.60
------- ------- ------- ------- ------- ------
Total From Investment Operations 0.01 0.27 0.29 0.30 0.70 1.11
------- ------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.36) (0.46) (0.46) (0.45) (0.55) (0.54)
Distributions (from net realized gains) -- -- -- (0.12) -- --
------- ------- ------- ------- ------- ------
Total Distributions (0.36) (0.46) (0.46) (0.57) (0.55) (0.54)
------- ------- ------- ------- ------- ------
Net Asset Value, End of Period $ 10.18 $ 10.53 $ 10.53 $ 10.72 $ 10.89 $11.16
======= ======= ======= ======= ======= ======
Total Return(5) 0.09% 2.59% 2.74% 2.79% 6.53% 10.88%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $16,059 $24,504 $32,815 $24,667 $16,985 $7,751
Ratio of Expenses to Average Net Assets 0.95% 0.95% 0.95% 0.95% 0.95% 1.04%
Ratio of Net Investment Income to Average
Net Assets 4.27% 3.80% 3.53% 2.98% 4.61% 5.15%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.11% 1.08% 1.05% 1.06% 1.08% 1.19%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 4.11% 3.67% 3.43% 2.87% 4.48% 5.00%
Portfolio Turnover Rate 220% 251% 127% 175% 197% 22%
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|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar U.S. Government Securities Fund, which merged into the U.S. Government Mortgage Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed to September 30 from October 31. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS B SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.54 $10.74 $10.90 $ 11.18 $11.03 $10.45
------ ------ ------ ------- ------ ------
Investment Operations:
Net Investment Income 0.27 0.33 0.30 0.28 0.42 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.31) (0.15) (0.08) (0.06) 0.20 0.62
------ ------ ------ ------- ------ ------
Total From Investment Operations (0.04) 0.18 0.22 0.22 0.62 1.05
------ ------ ------ ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.38) (0.38) (0.38) (0.47) (0.47)
Distributions (from net realized gains) -- -- -- (0.12) -- --
------ ------ ------ ------- ------ ------
Total Distributions (0.30) (0.38) (0.38) (0.50) (0.47) (0.47)
------ ------ ------ ------- ------ ------
Net Asset Value, End of Period $10.20 $10.54 $10.74 $ 10.90 $11.18 $11.03
====== ====== ====== ======= ====== ======
Total Return(5) (0.38)% 1.72% 2.02% 1.96% 5.79% 10.25%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,595 $7,926 $9,155 $11,397 $6,235 $2,039
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70% 1.71%
Ratio of Net Investment Income to Average
Net Assets 3.52% 3.05% 2.79% 2.22% 3.85% 4.37%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.86% 1.83% 1.80% 1.81% 1.83% 1.86%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.36% 2.92% 2.69% 2.11% 3.72% 4.22%
Portfolio Turnover Rate 220% 251% 127% 175% 197% 22%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar U.S. Government Securities Fund, which merged into the U.S. Government Mortgage Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed to September 30 from October 31. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
U.S. GOVERNMENT MORTGAGE FUND (CONTINUED)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS C SHARES June 30, 2006(1) 2005(2) 2004(2) 2003 2002 2001(2,3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.49 $10.68 $ 10.84 $ 11.13 $11.00 $10.98
------ ------ ------- ------- ------ ------
Investment Operations:
Net Investment Income 0.27 0.33 0.30 0.29 0.46 0.05
Realized and Unrealized Gains (Losses)
on Investments (0.31) (0.14) (0.09) (0.08) 0.15 (0.03)
------ ------ ------- ------- ------ ------
Total From Investment Operations (0.04) 0.19 0.21 0.21 0.61 0.02
------ ------ ------- ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.38) (0.37) (0.38) (0.48) --
Distributions (from net realized gains) -- -- -- (0.12) -- --
------ ------ ------- ------- ------ ------
Total Distributions (0.30) (0.38) (0.37) (0.50) (0.48) --
------ ------ ------- ------- ------ ------
Net Asset Value, End of Period $10.15 $10.49 $ 10.68 $ 10.84 $11.13 $11.00
====== ====== ======= ======= ====== ======
Total Return(4) (0.38)% 1.82% 2.02% 1.91% 5.78% 0.18%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,127 $6,585 $10,520 $18,801 $5,834 $ 105
Ratio of Expenses to Average Net Assets 1.70% 1.70% 1.70% 1.70% 1.70% 0.82%
Ratio of Net Investment Income to Average
Net Assets 3.52% 3.05% 2.79% 2.19% 3.92% 5.26%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.86% 1.83% 1.80% 1.81% 1.83% 1.12%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.36% 2.92% 2.69% 2.08% 3.79% 4.96%
Portfolio Turnover Rate 220% 251% 127% 175% 197% 22%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except return and portfolio turnover.
(2)Per share data calculated using average shares outstanding method.
(3)Class C shares have been offered since September 24, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS R SHARES June 30, 2006(3) 2005(4) 2004(4) 2003 2002 2001(4, 5)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.51 $10.72 $10.85 $ 11.12 $ 10.97 $ 10.40
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.31 0.37 0.39 0.30 0.49 0.62
Realized and Unrealized Gains
(Losses) on Investments (0.31) (0.14) (0.10) -- 0.20 0.49
------ ------ ------ ------- ------- -------
Total From Investment Operations 0.00 0.23 0.29 0.30 0.69 1.11
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment
income) (0.34) (0.44) (0.42) (0.45) (0.54) (0.54)
Distributions (from net realized
gains) -- -- -- (0.12) -- --
------ ------ ------ ------- ------- -------
Total Distributions (0.34) (0.44) (0.42) (0.57) (0.54) (0.54)
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.17 $10.51 $10.72 $ 10.85 $ 11.12 $ 10.97
====== ====== ====== ======= ======= =======
Total Return(6) 0.04% 2.18% 2.74% 2.79% 6.55% 10.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 7 $ 3 $ 1 $17,296 $21,355 $19,092
Ratio of Expenses to Average Net
Assets 1.20% 1.20% 0.95% 0.95% 0.95% 0.97%
Ratio of Net Investment Income to
Average Net Assets 4.04% 3.42% 3.58% 3.04% 4.59% 6.52%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.51% 1.48% 1.05% 1.06% 1.08% 1.15%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.73% 3.14% 3.48% 2.93% 4.46% 6.34%
Portfolio Turnover Rate 220% 251% 127% 175% 197% 22%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of Firstar U.S. Government Securities Fund, which merged into the U.S. Government Mortgage Fund on that date.
(2)Prior to July 1, 2004, Class R shares were named Class S shares, which had lower fees and expenses.
(3)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Per share data calculated using average shares outstanding method.
(5)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed to September 30 from October 31. All ratios for the period have been annualized, except total return and portfolio turnover.
(6)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
Additional Information
Financial Highlights CONTINUED
U.S. GOVERNMENT MORTGAGE FUND(1)
Fiscal period
Fiscal period ended
ended Fiscal year ended September 30, September 30,
CLASS Y SHARES June 30, 2006(2) 2005(3) 2004(3) 2003 2002 2001(3,4)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.53 $ 10.73 $ 10.89 $ 11.16 $ 11.01 $ 10.44
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.35 0.43 0.41 0.37 0.53 0.53
Realized and Unrealized Gains (Losses) on
Investments (0.31) (0.14) (0.08) (0.04) 0.19 0.60
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.04 0.29 0.33 0.33 0.72 1.13
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.38) (0.49) (0.49) (0.48) (0.57) (0.56)
Distributions (from net realized gains) -- -- -- (0.12) -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.38) (0.49) (0.49) (0.60) (0.57) (0.56)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.19 $ 10.53 $ 10.73 $ 10.89 $ 11.16 $ 11.01
======== ======== ======== ======== ======== ========
Total Return(5) 0.38% 2.75% 3.09% 3.03% 6.79% 11.14%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $140,407 $158,230 $171,143 $214,531 $181,046 $183,883
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.71%
Ratio of Net Investment Income to Average Net
Assets 4.52% 4.05% 3.79% 3.27% 4.84% 5.37%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.86% 0.83% 0.80% 0.81% 0.83% 0.85%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 4.36% 3.92% 3.69% 3.16% 4.71% 5.23%
Portfolio Turnover Rate 220% 251% 127% 175% 197% 22%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar U.S. Government Securities Fund, which merged into the U.S. Government Mortgage Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Per share data calculated using average shares outstanding method.
(4)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed to September 30 from October 31. All ratios for the period have been annualized, except total return and portfolio turnover.
(5)Total return would have been lower had certain expenses not been waived.
PROSPECTUS - First American Income Funds
(FIRST AMERICAN FUNDS LOGO)
FOR MORE INFORMATION
More information about the First American Funds is available on the funds' Internet site at www.firstamericanfunds.com and in the following documents:
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds' annual and semiannual reports to shareholders. In the funds' annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies and is incorporated into this prospectus by reference (which means that it is legally part of this prospectus).
You can obtain a free copy of the funds' most recent annual or semiannual reports or the SAI, request other information about the funds, or make other shareholder inquiries by calling Investor Services at 800 677-3863 (FUND) or by contacting the funds at the address below. Annual or semiannual reports and the SAI are also available on the funds' Internet site.
Information about the funds (including the SAI) can also be reviewed and copied at the Securities and Exchange Commission's (SEC) Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the funds are also available on the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, DC 20549-0102.
FIRST AMERICAN FUNDS
P.O. Box 1330
Minneapolis, MN 55440-1330
October 30, 2006
Prospectus
First American Investment Funds, Inc.
ASSET CLASS - BOND FUNDS
TAX FREE INCOME
FUNDS
CLASS A, CLASS C, AND CLASS Y SHARES
ARIZONA TAX FREE FUND
CALIFORNIA TAX FREE FUND
COLORADO TAX FREE FUND
MINNESOTA TAX FREE FUND
MISSOURI TAX FREE FUND
NEBRASKA TAX FREE FUND
OHIO TAX FREE FUND
TAX FREE FUND
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the shares
of these funds, or determined if the
information in this prospectus is
accurate or complete. Any statement to
the contrary is a criminal offense.
(FIRST AMERICAN FUNDS LOGO)
TABLE OF
CONTENTS
FUND SUMMARIES
Arizona Tax Free Fund 4
California Tax Free Fund 5
Colorado Tax Free Fund 6
Minnesota Tax Free Fund 7
Missouri Tax Free Fund 8
Nebraska Tax Free Fund 9
Ohio Tax Free Fund 10
Tax Free Fund 11
MORE ABOUT THE FUNDS
Investment Strategies, Risks and Other Investment
Matters 14
POLICIES AND SERVICES
Purchasing, Redeeming, and Exchanging Shares 16
Managing Your Investment 26
ADDITIONAL INFORMATION
Management 28
Financial Highlights 30
FOR MORE INFORMATION Back Cover
|
Fund Summaries
Introduction
This section of the prospectus describes the objectives of the First American Tax Free Funds, summarizes the principal investment strategies used by each fund in trying to achieve its objective, and highlights the risks involved with these strategies. It also provides you with information about the performance, fees, and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS PROSPECTUS AND THE RELATED STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES IN THE FUNDS, NOR SHALL ANY SUCH SHARES BE OFFERED OR SOLD TO ANY PERSON IN ANY JURISDICTION IN WHICH AN OFFER, SOLICITATION, PURCHASE, OR SALE WOULD BE UNLAWFUL UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
Fund Summaries
Fund Summaries
This section summarizes the investment objectives and principal strategies and risks of investing in First American Tax Free Funds. Each fund, except Tax Free Fund, is referred to in this prospectus as a "state-specific fund." You will find more specific information about each fund in the pages that follow.
INVESTMENT OBJECTIVES
The funds have the following investment objectives:
ARIZONA TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Arizona state income tax to the extent consistent with prudent investment risk.
CALIFORNIA TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and California state income tax to the extent consistent with prudent investment risk.
COLORADO TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Colorado state income tax to the extent consistent with prudent investment risk.
MINNESOTA TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Minnesota state income tax to the extent consistent with prudent investment risk.
MISSOURI TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Missouri state income tax to the extent consistent with prudent investment risk.
NEBRASKA TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Nebraska state income tax to the extent consistent with prudent investment risk.
OHIO TAX FREE FUND -- providing maximum current income that is exempt from both federal income tax and Ohio state income tax to the extent consistent with prudent investment risk.
TAX FREE FUND -- providing maximum current income that is exempt from federal income tax to the extent consistent with prudent investment risk.
PRINCIPAL STRATEGIES
FOR ARIZONA TAX FREE FUND, MISSOURI TAX FREE FUND, NEBRASKA TAX FREE FUND, OHIO TAX FREE FUND, AND TAX FREE FUND:
Under normal market conditions, each fund invests at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in municipal securities that pay interest that is exempt from federal and, for the state-specific funds, applicable state income tax, including the federal alternative minimum tax.
Each fund normally may invest up to 20% of its net assets in taxable obligations, including obligations the interest on which is subject to the federal alternative minimum tax.
FOR CALIFORNIA TAX FREE FUND, COLORADO TAX FREE FUND AND MINNESOTA TAX FREE FUND:
Under normal market conditions, each fund will invest at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in municipal securities that pay interest that is exempt from federal and applicable state income tax, including federal and applicable state alternative minimum tax.
Each fund normally may invest up to 20% of its net assets in taxable obligations, including obligations the interest on which is subject to federal and applicable state alternative minimum tax.
FURTHERMORE, FOR EACH FUND:
Each fund may invest in:
- "general obligation" bonds;
- "revenue" bonds;
- participation interests in municipal leases;
- zero coupon municipal securities; and
- inverse floating rate municipal securities (up to 10% of each fund's total assets).
Each fund invests mainly in securities that, at the time of purchase, are either rated investment grade or are unrated and determined to be of comparable quality by the fund's advisor. However, each fund may invest up to 5% of its total assets in securities that, at the time of purchase, are rated lower than investment grade or are unrated and of comparable quality (securities commonly referred to as "high-yield" securities or "junk bonds"). Each fund will not invest in securities rated lower than B- at the time of purchase or in unrated securities of equivalent quality. If the rating of a security is reduced or discontinued after purchase, the fund is not required to sell the security, but may consider doing so. Each fund's investments in high yield securities (rated and unrated) and investment-grade quality unrated securities will not exceed, in the aggregate, 25% of the fund's total assets (not including unrated securities that have been pre-refunded with U.S. Government securities and U.S. Government agency securities).
Each fund will attempt to maintain the weighted average maturity of its portfolio securities at 10 to 25 years under normal market conditions.
Fund Summaries
Fund Summaries CONTINUED
PRINCIPAL RISKS
The price and yield of each fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in these funds include:
- Active Management Risk
- Call Risk
- Credit Risk
- Income Risk
- Interest Rate Risk
- Inverse Floating Rate Securities Risk
- Municipal Lease Obligations Risk
- Political and Economic Risks
In addition, each fund, except Tax Free Fund, is subject to Non-Diversification Risk.
See "More About the Funds" for a discussion of these risks.
Fund Summaries
Arizona Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
4.74% 9.36% 5.23% 5.40% 2.83% 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 5.00% Worst Quarter: Quarter ended June 30, 2004 (2.54)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Five Years Inception --------------------------------------------------------------------------------------------------------------------- Arizona Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 2/1/00 (1.51)% 4.58% 6.10% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.64)% 4.46% 6.00% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 0.62% 4.52% 5.88% --------------------------------------------------------------------------------------------------------------------- Class C (return before taxes) 2/1/00 1.53% 5.08% 6.46% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/1/00 3.18% 5.77% 7.15% --------------------------------------------------------------------------------------------------------------------- Lehman Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 3.51% 5.59% 6.75% --------------------------------------------------------------------------------------------------------------------- Lipper Arizona Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 2.35% 4.56% 5.62% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index is calculated from 1/31/00.
(3)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in Arizona. The since inception performance of the average is calculated from 1/31/00.
Fund Summaries
California Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
4.31% 9.33% 4.98% 4.76% 2.93% 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 5.92% Worst Quarter: Quarter ended June 30, 2004 (2.34)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Five Years Inception --------------------------------------------------------------------------------------------------------------------- California Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 2/1/00 (1.42)% 4.32% 6.15% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.46)% 4.18% 6.02% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 0.44% 4.25% 5.88% --------------------------------------------------------------------------------------------------------------------- Class C (return before taxes) 2/1/00 1.56% 4.82% 6.53% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/1/00 3.28% 5.52% 7.19% --------------------------------------------------------------------------------------------------------------------- Lehman Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 3.51% 5.59% 6.75% --------------------------------------------------------------------------------------------------------------------- Lipper California Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.56% 4.03% 6.33% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index is calculated from 1/31/00.
(3)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in California. The since inception performance of the average is calculated from 1/31/00.
Fund Summaries
Colorado Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
5.35% 10.35% 5.26% 4.27% 3.09% 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 5.55% Worst Quarter: Quarter ended June 30, 2004 (2.28)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Five Years Inception ------------------------------------------------------------------------------------------------------------------------ Colorado Tax Free Fund ------------------------------------------------------------------------------------------------------------------------ Class A (return before taxes) 2/1/00 (1.31)% 4.72% 6.24% ------------------------------------------------------------------------------------------------------------------------ Class A (return after taxes on distributions) (1.79)% 4.56% 6.10% ------------------------------------------------------------------------------------------------------------------------ Class A (return after taxes on distributions and sale of fund shares) 1.15% 4.66% 6.02% ------------------------------------------------------------------------------------------------------------------------ Class C (return before taxes) 2/1/00 1.72% 5.21% 6.60% ------------------------------------------------------------------------------------------------------------------------ Class Y (return before taxes) 2/1/00 3.34% 5.89% 7.30% ------------------------------------------------------------------------------------------------------------------------ Lehman Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 3.51% 5.59% 6.75% ------------------------------------------------------------------------------------------------------------------------ Lipper Colorado Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 2.89% 4.95% 6.08% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index is calculated from 1/31/00.
(3)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in Colorado. The since inception performance of the average is calculated from 1/31/00.
Fund Summaries
Minnesota Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1,2)
(BAR CHART)
2.73% 8.77% 6.40% (2.92)% 9.60% 4.62% 8.56% 5.18% 3.73% 4.26% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.23% Worst Quarter: Quarter ended March 31, 1996 (2.90)% |
Since Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception Inception
AS OF 12/31/05(2) Date One Year Five Years Ten Years (Class C) (Class Y)
---------------------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 7/11/88 (0.19)% 4.35% 4.58% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on
distributions) (0.23)% 4.28% 4.49% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on
distributions and sale of fund shares) 1.36% 4.32% 4.54% N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/99 2.87% 4.83% N/A 4.17% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 8/1/97 4.53% 5.52% N/A N/A 5.31%
---------------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses,
or taxes) 3.51% 5.59% 5.72% 5.19% 5.54%
---------------------------------------------------------------------------------------------------------------------------------
Lipper Minnesota Municipal Debt Funds
Category Average(4)
(reflects no deduction for sales charges
or taxes) 3.01% 4.79% 4.59% 4.15% 4.49%
|
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 7/31/98 represents that of the Piper Minnesota Tax-Exempt Fund, a series of Piper Funds Inc., which merged into the fund on that date.
(3)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index is calculated from 1/31/99 and 7/31/97 for Class C and Class Y shares, respectively.
(4)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in Minnesota. The since inception performance of the average is calculated from 1/31/99 and 7/31/97 for Class C and Class Y shares, respectively.
Fund Summaries
Missouri Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class Y shares has varied from year to year. The performance of Class A and Class C shares will be lower due to their higher expenses.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class Y shares, the table includes returns both before and after taxes. For Class A and Class C shares, the table only includes returns before taxes. After-tax returns for Class A and Class C shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS Y)(1,2)
(BAR CHART)
3.19% 8.29% 5.41% (2.85)% 10.88% 4.10% 9.42% 5.11% 3.54% 2.76% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.86% Worst Quarter: Quarter ended June 30, 2004 (2.25)% |
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/05(2) Date One Year Five Years Ten Years (Class C)
---------------------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 9/28/90 (1.82)% 3.79% 4.22% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 9/24/01 1.12% N/A N/A 3.93%
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 7/15/88 2.76% 4.96% 4.96% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions) 2.64% 4.87% 4.89% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions and sale
of fund shares) 3.34% 4.83% 4.87% N/A
---------------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or taxes) 3.51% 5.59% 5.72% 5.21%
---------------------------------------------------------------------------------------------------------------------------------
Lipper Missouri Municipal Debt Funds Category Average(4)
(reflects no deduction for sales charges or taxes) 3.05% 4.78% 4.77% 4.51%
|
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 9/24/01 represents that of the Firstar Missouri Tax-Exempt Bond Fund, a series of Firstar Funds, Inc., which merged into the fund on that date. The Firstar Missouri Tax-Exempt Bond Fund was organized on 12/11/00 and, prior to that, was a separate series of Mercantile Mutual Funds, Inc. The Mercantile fund was organized on 10/2/95 and, prior to that, was a separate portfolio of the ARCH Tax-Exempt Trust, which sold shares of the portfolio that were similar to the current Class Y shares of the fund.
(3)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index is calculated from 9/30/01 for Class C shares.
(4)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in Missouri. The since inception performance of the average is calculated from 9/30/01 for Class C shares.
Fund Summaries
Nebraska Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
10.19% 4.97% 3.96% 3.02% 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.97% Worst Quarter: Quarter ended June 30, 2004 (2.34)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Inception ----------------------------------------------------------------------------------------------------- Nebraska Tax Free Fund ----------------------------------------------------------------------------------------------------- Class A (return before taxes) 2/28/01 (1.33)% 4.29% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.36)% 4.27% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 0.51% 4.23% ----------------------------------------------------------------------------------------------------- Class C (return before taxes) 2/28/01 1.63% 4.69% ----------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/28/01 3.28% 5.48% ----------------------------------------------------------------------------------------------------- Lehman Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 3.51% 5.50% ----------------------------------------------------------------------------------------------------- Lipper Other States Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 2.37% 4.31% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more.
(3)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in a specified state.
Fund Summaries
Ohio Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
4.89% 3.77% 2.64% 2003 2004 2005 Best Quarter: Quarter ended September 30, 2004 4.12% Worst Quarter: Quarter ended June 30, 2004 (2.50)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Inception ----------------------------------------------------------------------------------------------------- Ohio Tax Free Fund ----------------------------------------------------------------------------------------------------- Class A (return before taxes) 4/30/02 (1.76)% 3.77% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.78)% 3.69% ----------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 0.08% 3.71% ----------------------------------------------------------------------------------------------------- Class C (return before taxes) 4/30/02 1.29% 4.31% ----------------------------------------------------------------------------------------------------- Class Y (return before taxes) 4/30/02 2.90% 5.28% ----------------------------------------------------------------------------------------------------- Lehman Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 3.51% 5.41% ----------------------------------------------------------------------------------------------------- Lipper Ohio Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 2.47% 4.39% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more.
(3)Represents funds that invest primarily in those securities that provide income that is exempt from taxation in Ohio.
Fund Summaries
Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class C shares will be lower due to their higher expenses. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class C and Class Y shares, the table only includes returns before taxes. After-tax returns for Class C and Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1,2)
(BAR CHART)
9.94% 5.94% (4.33)% 12.31% 3.73% 9.46% 5.83% 4.23% 4.19% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 5.16% Worst Quarter: Quarter ended June 30, 1997 (2.76)% |
Since
Inception Since
AVERAGE ANNUAL TOTAL RETURNS Inception (Class A Inception
AS OF 12/31/05(2) Date One Year Five Years and Class Y) (Class C)
---------------------------------------------------------------------------------------------------------------------------------
Tax Free Fund
---------------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 11/18/96 (0.22)% 4.55% 5.08% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (0.28)% 4.43% 4.83% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and
sale of fund shares) 1.36% 4.48% 4.84% N/A
---------------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 9/24/01 2.78% N/A N/A 4.91%
---------------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 11/18/96 4.45% 5.75% 5.80% N/A
---------------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or taxes) 3.51% 5.59% 5.75% 5.21%
---------------------------------------------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds Category
Average(4)
(reflects no deduction for sales charges or taxes) 3.00% 3.88% 4.82% 4.42%
|
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance presented prior to 9/24/01 represents that of the Firstar National Municipal Bond Fund, a series of Firstar Funds, Inc., which merged with the fund on that date.
(3)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities of one year or more. The since inception performance of the index for Class A, Class C, and Class Y shares is calculated from 11/30/96, 9/30/01, and 11/30/96, respectively.
(4)Represents funds that invest primarily in municipal debt issues in the top four credit ratings. The since inception performance of the average for Class A, Class C, and Class Y shares is calculated from 11/30/96, 9/30/01, and 11/30/96, respectively.
Fund Summaries
Fees and Expenses
The tables below describe the fees and expenses that you may pay if you buy and hold shares of the funds.
------------------------------------------------------------------------------------------------------ SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A(1) CLASS C CLASS Y ------------------------------------------------------------------------------------------------------ MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (as a percentage of offering price) 4.25% 0.00% None MAXIMUM DEFERRED SALES CHARGE (LOAD) (as a percentage of original purchase price or redemption proceeds, whichever is less) 0.00% 1.00% None ANNUAL MAINTENANCE FEE only charged to accounts with balances below $500 $50 $50 None ------------------------------------------------------------------------------------------------------ |
(1)Investors may qualify for reduced sales charges. Investments of $1 million or more on which no front-end sales charge is paid may be subject to a 1% contingent deferred sales charge.
-----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS A Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% 0.25% 0.72% 1.47%
California Tax Free Fund 0.50% 0.25% 0.59% 1.34%
Colorado Tax Free Fund 0.50% 0.25% 0.77% 1.52%
Minnesota Tax Free Fund 0.50% 0.25% 0.35% 1.10%
Missouri Tax Free Fund 0.50% 0.25% 0.34% 1.09%
Nebraska Tax Free Fund 0.50% 0.25% 0.55% 1.30%
Ohio Tax Free Fund 0.50% 0.25% 0.53% 1.28%
Tax Free Fund 0.50% 0.25% 0.31% 1.06%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.75% for Arizona Tax Free Fund, California Tax Free Fund, Colorado Tax Free Fund, Nebraska Tax Free Fund, and Ohio Tax Free Fund, and 0.95% for Minnesota Tax Free Fund, Missouri Tax Free Fund, and Tax Free Fund.
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS C Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% 0.65% 0.72% 1.87%
California Tax Free Fund 0.50% 0.65% 0.59% 1.74%
Colorado Tax Free Fund 0.50% 0.65% 0.77% 1.92%
Minnesota Tax Free Fund 0.50% 0.65% 0.35% 1.50%
Missouri Tax Free Fund 0.50% 0.65% 0.34% 1.49%
Nebraska Tax Free Fund 0.50% 0.65% 0.55% 1.70%
Ohio Tax Free Fund 0.50% 0.65% 0.53% 1.68%
Tax Free Fund 0.50% 0.65% 0.31% 1.46%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers, restated to reflect current fees. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 1.15% for Arizona Tax Free Fund, California Tax Free Fund, Colorado Tax Free Fund, Nebraska Tax Free Fund, and Ohio Tax Free Fund, and 1.35% for Minnesota Tax Free Fund, Missouri Tax Free Fund, and Tax Free Fund.
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS Y Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% None 0.72% 1.22%
California Tax Free Fund 0.50% None 0.59% 1.09%
Colorado Tax Free Fund 0.50% None 0.77% 1.27%
Minnesota Tax Free Fund 0.50% None 0.35% 0.85%
Missouri Tax Free Fund 0.50% None 0.34% 0.84%
Nebraska Tax Free Fund 0.50% None 0.55% 1.05%
Ohio Tax Free Fund 0.50% None 0.53% 1.03%
Tax Free Fund 0.50% None 0.31% 0.81%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.50% for Arizona Tax Free Fund, California Tax Free Fund, Colorado Tax Free Fund, Nebraska Tax Free Fund, and Ohio Tax Free Fund, and 0.70% for Minnesota Tax Free Fund, Missouri Tax Free Fund, and Tax Free Fund.
Fund Summaries
Fees and Expenses CONTINUED
EXAMPLE This example is intended to help you compare the cost of investing in a fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 for the time periods indicated, that your investment has a 5% return each year, and that the funds' operating expenses remain the same. Although your actual costs and returns may differ, based on these assumptions your costs would be:
CLASS A One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- Arizona Tax Free Fund $568 $870 $1,194 $2,108 --------------------------------------------------------------------------------------------------------------------------- California Tax Free Fund $556 $831 $1,128 $1,969 --------------------------------------------------------------------------------------------------------------------------- Colorado Tax Free Fund $573 $885 $1,219 $2,160 --------------------------------------------------------------------------------------------------------------------------- Minnesota Tax Free Fund $532 $760 $1,005 $1,708 --------------------------------------------------------------------------------------------------------------------------- Missouri Tax Free Fund $531 $757 $1,000 $1,697 --------------------------------------------------------------------------------------------------------------------------- Nebraska Tax Free Fund $552 $820 $1,108 $1,926 --------------------------------------------------------------------------------------------------------------------------- Ohio Tax Free Fund $550 $814 $1,097 $1,905 --------------------------------------------------------------------------------------------------------------------------- Tax Free Fund $528 $748 $ 985 $1,664 |
CLASS C (ASSUMING REDEMPTION AT END OF EACH PERIOD) One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- Arizona Tax Free Fund $290 $588 $1,011 $2,190 --------------------------------------------------------------------------------------------------------------------------- California Tax Free Fund $277 $548 $ 944 $2,052 --------------------------------------------------------------------------------------------------------------------------- Colorado Tax Free Fund $295 $603 $1,037 $2,243 --------------------------------------------------------------------------------------------------------------------------- Minnesota Tax Free Fund $253 $474 $ 818 $1,791 --------------------------------------------------------------------------------------------------------------------------- Missouri Tax Free Fund $252 $471 $ 813 $1,779 --------------------------------------------------------------------------------------------------------------------------- Nebraska Tax Free Fund $273 $536 $ 923 $2,009 --------------------------------------------------------------------------------------------------------------------------- Ohio Tax Free Fund $271 $530 $ 913 $1,987 --------------------------------------------------------------------------------------------------------------------------- Tax Free Fund $249 $462 $ 797 $1,746 |
CLASS C (ASSUMING NO REDEMPTION AT END OF EACH PERIOD) One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- Arizona Tax Free Fund $190 $588 $1,011 $2,190 --------------------------------------------------------------------------------------------------------------------------- California Tax Free Fund $177 $548 $ 944 $2,052 --------------------------------------------------------------------------------------------------------------------------- Colorado Tax Free Fund $195 $603 $1,037 $2,243 --------------------------------------------------------------------------------------------------------------------------- Minnesota Tax Free Fund $153 $474 $ 818 $1,791 --------------------------------------------------------------------------------------------------------------------------- Missouri Tax Free Fund $152 $471 $ 813 $1,779 --------------------------------------------------------------------------------------------------------------------------- Nebraska Tax Free Fund $173 $536 $ 923 $2,009 --------------------------------------------------------------------------------------------------------------------------- Ohio Tax Free Fund $171 $530 $ 913 $1,987 --------------------------------------------------------------------------------------------------------------------------- Tax Free Fund $149 $462 $ 797 $1,746 |
CLASS Y One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- Arizona Tax Free Fund $124 $387 $670 $1,477 --------------------------------------------------------------------------------------------------------------------------- California Tax Free Fund $111 $347 $601 $1,329 --------------------------------------------------------------------------------------------------------------------------- Colorado Tax Free Fund $129 $403 $697 $1,534 --------------------------------------------------------------------------------------------------------------------------- Minnesota Tax Free Fund $ 87 $271 $471 $1,049 --------------------------------------------------------------------------------------------------------------------------- Missouri Tax Free Fund $ 86 $268 $466 $1,037 --------------------------------------------------------------------------------------------------------------------------- Nebraska Tax Free Fund $107 $334 $579 $1,283 --------------------------------------------------------------------------------------------------------------------------- Ohio Tax Free Fund $105 $328 $569 $1,259 --------------------------------------------------------------------------------------------------------------------------- Tax Free Fund $ 83 $259 $450 $1,002 |
More About the Funds
Investment Strategies, Risks and Other Investment Matters
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may be changed without shareholder approval. If a fund's objective changes, you will be notified at least 60 days in advance. Please remember, there is no guarantee that any fund will achieve its objective.
INVESTMENT STRATEGIES
The funds' principal investment strategies are discussed in the "Fund Summaries" section. These are the strategies that the funds' investment advisor believes are most likely to be important in trying to achieve the funds' objectives. This section provides more information about some of the funds' principal and non-principal investment strategies. You should be aware that each fund may also use strategies and invest in securities that are not described in this prospectus, but that are described in the Statement of Additional Information (SAI). For a copy of the SAI, call Investor Services at 800 677-FUND.
Investment Approach. In selecting securities for the funds, fund managers first determine their economic outlook and the direction in which inflation and interest rates are expected to move. In selecting individual securities consistent with this outlook, the fund managers evaluate factors such as credit quality, yield, maturity, liquidity, and portfolio diversification. In the case of Tax Free Fund, geographical diversification is also a factor. Fund managers conduct research on potential and current holdings in the funds to determine whether a fund should purchase or retain a security. This is a continuing process the focus of which changes according to market conditions, the availability of various permitted investments, and cash flows into and out of the funds.
Municipal Securities. Municipal securities are issued to finance public infrastructure projects such as streets and highways, schools, water and sewer systems, hospitals, and airports. They also may be issued to refinance outstanding obligations as well as to obtain funds for general operating expenses and for loans to other public institutions and facilities.
The funds may invest in municipal securities such as "general obligation" bonds, "revenue" bonds, and participation interests in municipal leases. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Revenue bonds are payable only from the revenues generated by a specific project or from another specific revenue source. Participation interests in municipal leases are undivided interests in a lease, installment purchase contract, or conditional sale contract entered into by a state or local government unit to acquire equipment or facilities.
The municipal securities in which the funds invest may include refunded bonds and zero coupon bonds. Refunded bonds may have originally been issued as general obligation or revenue bonds, but become "refunded" when they are secured by an escrow fund, usually consisting entirely of direct U.S. government obligations and/or U.S. government agency obligations. Zero coupon bonds are issued at substantial discounts from their value at maturity and pay no cash income to their holders until they mature. When held to maturity, their entire return comes from the difference between their purchase price and their maturity value.
Ratings. The funds have investment strategies requiring them to invest in municipal securities that have received a particular rating from a rating service such as Moody's or Standard & Poor's. Any reference in this prospectus to a specific rating encompasses all gradations of that rating. For example, if the prospectus says that a fund may invest in securities rated as low as B, the fund may invest in securities rated B-.
Temporary Investments. In an attempt to respond to adverse market, economic, political, or other conditions, each fund may temporarily invest without limit in cash and in U.S. dollar-denominated high-quality money market instruments and other short-term securities, including securities which pay income that is subject to federal and state income tax. These investments may include money market funds advised by the funds' advisor. Because these investments may be taxable, and may result in a lower yield than would be available from investments with a lower quality or longer term, they may prevent a fund from achieving its investment objective.
Portfolio Turnover. Fund managers may trade securities frequently, resulting, from time to time, in an annual portfolio turnover rate of over 100%. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of commissions or mark-ups to broker-dealers that the fund pays when it buys and sells securities. The "Financial Highlights" section of this prospectus shows each fund's historical portfolio turnover rate.
PRINCIPAL RISKS
The principal risks of investing in each fund are identified in the "Fund Summaries" section. These risks are described below.
Active Management Risk. Each fund is actively managed and its performance therefore will reflect in part the advisor's ability to make investment decisions which are suited to achieving the fund's investment objective. Due to its active management, a fund could underperform other mutual funds with similar investment objectives.
Call Risk. Many municipal bonds may be redeemed at the option of the issuer, or "called," before their stated maturity date. In general, an issuer will call its bonds if they can be refinanced by issuing new bonds which bear a lower interest rate. The funds are subject to the possibility that during periods of falling interest rates, a municipal bond issuer will call its high-yielding bonds. A fund would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the fund's income.
More About the Funds
Investment Strategies, Risks and Other Investment Matters CONTINUED
Credit Risk. Each fund is subject to the risk that the issuers of debt securities held by the fund will not make payments on the securities. There is also the risk that an issuer could suffer adverse changes in financial condition that could lower the credit quality of a security. This could lead to greater volatility in the price of the security and in shares of the fund. Also, a change in the credit quality rating of a bond could affect the bond's liquidity and make it more difficult for the fund to sell. In adverse economic or other circumstances, issuers of lower rated securities are more likely to have difficulty making principal and interest payments than issuers of higher rated securities. When a fund purchases unrated securities, it will depend on the advisor's analysis of credit risk without the assessment of an independent rating organization, such as Moody's or S&P.
Income Risk. Each fund's income could decline due to falling market interest rates. This is because, in a falling interest rate environment, the funds generally will have to invest the proceeds from sales of fund shares, as well as the proceeds from maturing portfolio securities (or portfolio securities that have been called, see "Call Risk" above), in lower-yielding securities.
Interest Rate Risk. Debt securities in the funds will fluctuate in value with changes in interest rates. In general, debt securities will increase in value when interest rates fall and decrease in value when interest rates rise. Longer-term debt securities are generally more sensitive to interest rate changes. Each fund may invest in zero coupon securities, which do not pay interest on a current basis and which may be highly volatile as interest rates rise or fall. The funds' investments in inverse floating rate municipal securities also may be highly volatile with changing interest rates. See "Inverse Floating Rate Securities Risk" below.
Inverse Floating Rate Securities Risk. Each fund may invest up to 10% of its total assets in inverse floating rate municipal securities. These securities pay interest at a rate that varies inversely to changes in the interest rate of specified municipal securities or a specified index. The interest rate on this type of security will generally change at a multiple of any change in the reference interest rate. As a result, the values of these securities may be highly volatile as interest rates rise or fall.
Municipal Lease Obligations Risk. Each fund may purchase participation interests in municipal leases. These are undivided interests in a lease, installment purchase contract, or conditional sale contract entered into by a state or local government unit to acquire equipment or facilities. Participation interests in municipal leases pose special risks because many leases and contracts contain "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body. Although these kinds of obligations are secured by the leased equipment or facilities, it might be difficult and time consuming to dispose of the equipment or facilities in the event of non-appropriation, and the fund might not recover the full principal amount of the obligation.
Non-Diversification Risk. Each fund other than Tax Free Fund is non-diversified. A non-diversified fund may invest a larger portion of its assets in a fewer number of issuers than a diversified fund. Because a relatively high percentage of the fund's assets may be invested in the securities of a limited number of issuers, the fund's portfolio may be more susceptible to any single economic, political or regulatory occurrence than the portfolio of a diversified fund.
Political and Economic Risks. The values of municipal securities may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. Other factors that could affect municipal securities include a change in the local, state, or national economy, demographic factors, ecological or environmental concerns, statutory limitations on the issuer's ability to increase taxes, and other developments generally affecting the revenue of issuers (for example, legislation or court decisions reducing state aid to local governments or mandating additional services). To the extent a fund invests in the securities of issuers located in a single state, it will be disproportionately affected by political and economic conditions and developments in that state. The value of municipal securities also may be adversely affected by future changes in federal or state income tax laws, including rate reductions, the imposition of a flat tax, or the loss of a current state income tax exemption.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the funds' policies and procedures with respect to the disclosure of each fund's portfolio securities is available in the funds' SAI.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares
GENERAL
You may purchase, redeem, or exchange shares of the funds on any day when the New York Stock Exchange (NYSE) is open, except that shares cannot be purchased by wire transfer on days that federally chartered banks are closed. Purchases, redemptions and exchanges may be restricted in the event of an early or unscheduled close of the NYSE.
The funds have authorized certain investment professionals and financial institutions ("financial intermediaries") to accept purchase, redemption, or exchange orders on their behalf. Your purchase or redemption price will be based on that day's net asset value (NAV) per share if your order is received by the funds or an authorized financial intermediary in proper form prior to the time the funds calculate their NAV. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Calculating Net Asset Value" below. Contact your financial intermediary to determine the time by which it must receive your order to be assured same day processing. To make sure your order is in proper form, you must follow the instructions set forth below under "Purchase, Redemption and Exchange Procedures."
Some financial intermediaries may charge a fee for helping you purchase, redeem or exchange shares. Contact your financial intermediary for more information. No such fee will be imposed if you purchase shares directly from the funds.
The funds may be offered only to persons in the United States. This prospectus should not be considered a solicitation or offering of fund shares outside the United States.
CHOOSING A SHARE CLASS
The funds issue their shares in three classes -- Class A, Class C and Class Y shares -- with each class having a different cost structure. As noted below, only certain eligible investors can purchase Class Y shares of the funds, whereas Class A and Class C shares (the "Retail Share Classes") are generally available to investors. You should decide which share class best suits your needs.
Eligibility to Invest in Class Y Shares
Class Y shares are offered to clients of financial intermediaries who have been authorized to offer Class Y shares and who charge such clients an ongoing fee for advisory, investment, consulting or similar services. Such clients may include, but are not limited to, individuals, corporations, endowments and pension plans (including tax-deferred retirement plans and profit sharing plans).
Class Share Overview
ANNUAL 12B-1 FEES
(AS A % OF NET ASSETS)
--------------------------------
FRONT-END CONTINGENT SHAREHOLDER
SALES CHARGE DEFERRED SALES DISTRIBUTION SERVICING
(FESC) CHARGE (CDSC) FEE FEE
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Class A 4.25%(1) 0.00%(2) No 0.25%
Class C(3) 0.00% 1.00%(4) 0.50% 0.15%
Class Y No No No No
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(1)The FESC is reduced for larger purchases. See "Determining Your Share Price -- Class A Shares" below.
(2)Class A share investments of $1 million or more on which no FESC is paid may be subject to a 1% CDSC.
(3)Class C shares do not convert to Class A shares so they will continue to have higher annual expenses than Class A shares for as long as you hold them.
(4)A 1.00% CDSC applies if you redeem your Class C shares within 12 months of purchase.
Among the Retail Share Classes, Class A shares may be a better choice if your investment qualifies for a reduced sales charge. You should not place Class C share orders that would cause your total investment in First American Funds Class A, Class B and Class C shares (not including First American money market funds) to equal or exceed $1 million dollars in the case of an order for Class C shares, using the aggregation principles discussed below under "Determining Your Share Price -- Class A Shares -- Reducing Your Sales Charge on Class A Shares." To the extent operationally possible, these orders will be automatically rejected.
Class Y shares are generally a better choice than a Retail Share Class if you are eligible to purchase this share class.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
DETERMINING YOUR SHARE PRICE
Class A Shares
Your purchase price for Class A shares is typically the net asset value of your shares, plus a front-end sales charge. Sales charges vary depending on the amount of your purchase. The sales charge you pay may differ slightly from the amount set forth below because of rounding that occurs in the calculation used to determine your sales charge.
Sales Charge
-------------------------------
As a % As a %
of of Net
Offering Asset
Purchase Amount Price Value
---------------------------------------------------------------------------------------------
Less than $50,000 4.25% 4.44%
$50,000 - $99,999 4.00% 4.17%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1 million and over 0.00% 0.00%
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Reducing Your Sales Charge on Class A Shares. As shown in the preceding table, larger purchases of Class A shares reduce the percentage sales charge you pay. In determining whether you are entitled to pay a reduced sales charge, you may aggregate certain other purchases with your current purchase, as follows.
Prior Purchases. Prior purchases of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) will be factored into your sales charge calculation. You will receive credit for the current net asset value of the other Class A, Class B, and Class C shares you hold at the time of your purchase, including shares held in individual retirement, custodial or personal trust accounts. For example, let's say you're making a $10,000 investment and you already own other First American Fund Class A shares that are currently valued at $45,000. You will receive credit for the current value of these shares and your sales charge will be based on a total purchase amount of $55,000. If the current net asset value of your shares is less than their original purchase price, you may receive credit for their original purchase price instead, but only if you provide a written request to the funds and provide them with the records necessary to demonstrate the shares' purchase price.
Purchases by Related Accounts. Concurrent and prior purchases by certain other accounts of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) also will be combined with your purchase to determine your sales charge. The fund will combine purchases made by you, your spouse or domestic partner, and your dependent children when it calculates the sales charge, including purchases in individual retirement, custodial and personal trust accounts.
Letter of Intent. If you plan to invest $50,000 or more over a 13-month period in Class A, Class B, or Class C shares of any First American Fund except the money market funds, you may reduce your sales charge for Class A purchases by signing a non-binding letter of intent. If you do not fulfill the letter of intent, you must pay the applicable sales charge. In addition, if you reduce your sales charge to zero under a letter of intent and then sell your Class A shares within 18 months of their purchase, you may be charged a contingent deferred sales charge of 1%. See "Class A Share Investments of Over $1 Million" below.
It is your responsibility to determine whether you are entitled to pay a reduced sales charge. The fund is not responsible for making this determination. To receive a reduced sales charge, you must notify the fund at the time of the purchase order that a quantity discount may apply to your current purchase. If you purchase shares by mail, you must notify the fund in writing. Otherwise, simply inform your financial intermediary, or Investor Services if you are purchasing shares directly from the funds, and they will notify the fund.
You should provide your financial intermediary with information or records regarding any other accounts in which there are holdings eligible to be aggregated, including:
- all of your accounts at your financial intermediary.
- all of your accounts at any other financial intermediary.
- all accounts of any related party (such as a spouse or dependent child) held with any financial intermediary.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
You should keep the records necessary to demonstrate the purchase price of shares held in these accounts since neither the fund and its transfer agent nor your financial intermediary may have this information.
More information on these ways to reduce your sales charge appears in the SAI.
Purchasing Class A Shares Without a Sales Charge. The following persons may purchase a fund's Class A shares at net asset value without a sales charge:
- directors, advisory board members, full-time employees and retirees of the advisor and its affiliates.
- current and retired officers and directors of the funds.
- full-time employees of any broker-dealer authorized to sell fund shares.
- full-time employees of the fund's counsel.
- members of the immediate families of any of the foregoing (i.e., a spouse or domestic partner and any dependent children).
- persons who purchase the funds through "one-stop" mutual fund networks through which the funds are made available.
- persons participating in a fee-based program sponsored and maintained by a registered broker-dealer.
- trust companies and bank trust departments acting in a fiduciary, advisory, agency, custodial or similar capacity.
- group retirement plans sponsored or administered by affiliates of the advisor.
- group retirement plans with at least $2.5 million in plan assets. (This minimum may be waived at the discretion of the distributor for purchases by group retirement plans made through financial institutions such as banks or record keepers.)
Reinvesting After a Redemption. If you redeem Class A shares of a First American Fund (except money market fund shares on which you have not paid a sales charge), you may reinvest in Class A shares of that fund or another First American fund within 180 days without a sales charge. To reinvest in Class A shares at net asset value (without paying a sales charge), you must notify the Fund directly in writing or notify your financial intermediary.
Class A Share Investments of Over $1 Million. There is no initial sales charge on Class A share purchases of $1 million or more (including purchases that reach the $1 million level as a result of aggregating prior purchases and purchases by related accounts). However, your financial intermediary may receive a commission of up to 1% on your purchase. If such a commission is paid, you will be assessed a contingent deferred sales charge (CDSC) of 1% if you sell your shares within 18 months. The CDSC you pay may differ slightly from this amount because of rounding that occurs in the calculation used to determine your CDSC. To find out whether you will be assessed a CDSC, ask your financial intermediary.
The CDSC is based on the value of your shares at the time of purchase in the case of a partial redemption. If you redeem all of your shares, the CDSC is based on the value of your shares at the time of purchase or at the time of redemption, whichever is less. The charge does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class A shares that are not subject to a CDSC will be redeemed first. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
Additional Information on Reducing Sales Charges. A link to information regarding the funds' Class A sales charge breakpoints is available on the funds' web site at www.firstamericanfunds.com.
Class C Shares
Your purchase price for Class C shares is their net asset value -- there is no front-end sales charge. However, if you redeem your shares within 12 months of purchase, you will be assessed a CDSC of 1% of the value of your shares at the time of purchase or at the time of sale, whichever is less. The CDSC you pay may differ slightly from this amount because of rounding that occurs in the calculation used to determine your CDSC. The CDSC does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class C shares that are not subject to a CDSC will be redeemed first. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Waiving Contingent Deferred Sales Charges
CDSCs on Class A and Class C share redemptions will be waived for:
- redemptions following the death or disability (as defined in the Internal Revenue Code) of a shareholder.
- redemptions that equal the minimum required distribution from an IRA or other retirement plan to a shareholder who has reached the age of 70 1/2.
- redemptions through a systematic withdrawal plan, at a rate of up to 12% a year of your account's value. The systematic withdrawal limit will be based on the market value of your account at the time of each withdrawal.
- redemptions required as a result of over-contribution to an IRA plan.
Class Y Shares
Your purchase price for Class Y shares is their net asset value. This share class does not have a front-end sales charge or a CDSC.
12B-1 FEES
Each fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act that allows each fund to pay the fund's distributor an annual fee for the distribution and sale of its shares and/or for services provided to shareholders. The funds do not pay 12b-1 fees on Class Y shares.
For: 12b-1 fees are equal to: ------------------------------------------------------------------------------------------------ Class A 0.25% of average daily net assets Class C 0.65% of average daily net assets Class Y Not applicable ------------------------------------------------------------------------------------------------ |
The 12b-1 fees paid by the funds are designated as distribution fees and/or shareholder servicing fees, as described above under "Class Share Overview." The funds' distributor uses the 12b-1 fees to compensate financial intermediaries for sales and/or administrative services performed on behalf of fund shareholders. Because these fees are paid out of a fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
COMPENSATION PAID TO FINANCIAL INTERMEDIARIES
The funds' distributor receives any front-end sales charge or CDSC that you pay and any 12b-1 fees paid by the funds. From this revenue, the distributor will pay financial intermediaries for the services they provide. The funds' advisor and/or distributor may make additional payments to intermediaries from their own assets, as described below under "Additional Payments to Financial Intermediaries."
Sales Charge Reallowance
The distributor pays (or "reallows") a portion of the front-end sales charge on Class A shares to your financial intermediary, as follows.
Maximum Reallowance
as a % of
Purchase Amount Purchase Price
-----------------------------------------------------------------------------------------------
Less than $50,000 4.00%
$50,000 - $99,999 3.75%
$100,000 - $249,999 3.25%
$250,000 - $499,999 2.25%
$500,000 - $999,999 1.75%
$1 million and over 0.00%
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Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Sales Commissions
There is no initial sales charge on Class A share purchases of $1 million or more, however, your financial intermediary may receive a commission of up to 1% on your purchase. Although you pay no front-end sales charge when you buy Class C shares, the funds' distributor pays a sales commission of 1.00% of the amount invested to intermediaries selling Class C shares.
12b-1 Fees
The funds' distributor uses the 12b-1 shareholder servicing fee to compensate financial intermediaries for administrative services performed on behalf of the intermediaries' customers. These intermediaries receive shareholder servicing fees of 0.25% of a fund's Class A share and 0.15% of a fund's Class C share average daily net assets attributable to shares sold through them. For Class A shares, the distributor begins to pay shareholder servicing fees to these intermediaries immediately after you purchase shares. For Class C shares, the distributor begins to pay shareholder servicing fees to these intermediaries one year after you purchase shares, but only if you continue to hold the shares at that time. In both cases, the intermediaries continue to receive these fees for as long as you hold fund shares.
The funds' distributor uses the 12b-1 distribution fee to compensate financial intermediaries for the sale of fund shares to their customers. The funds' distributor pays intermediaries that sell Class C shares a 0.50% annual distribution fee beginning one year after the shares are sold.
Additional Payments to Financial Intermediaries
The advisor and/or the distributor may pay additional compensation to financial intermediaries out of their own resources in connection with the sale or retention of fund shares and/or in exchange for sales and/or administrative services performed on behalf of the intermediaries' customers. The amount of these payments may be significant, and may create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the funds to you. These payments are not reflected in the fees and expenses listed in the "Fund Summaries" section of the prospectus because they are not paid by the funds.
These payments are negotiated and may be based on such factors as the number or value of shares that the financial intermediary sells or may sell; the value of the assets invested in the funds by the intermediary's customers; reimbursement of ticket or operational charges (fees that an intermediary charges its representatives for effecting transactions in fund shares); lump sum payment for services provided; the type and nature of services or support furnished by the intermediary; and/or other measures as determined from time to time by the advisor and/or distributor.
The advisor and/or distributor may make other payments or allow other promotional incentives to financial intermediaries to the extent permitted by SEC and NASD rules and by other applicable laws and regulations. Certain intermediaries also receive payments in recognition of sub-accounting, recordkeeping or other services they provide to shareholders or plan participants who invest in the fund or other First American Funds through their retirement plan.
You can ask your financial intermediary for information about any payments it receives from the advisor and/or the distributor and from the funds, and any services your intermediary provides, as well as about fees and/or commissions your intermediary charges. You can also find more details about payments made by the advisor, and/or the distributor in the funds' SAI.
PURCHASE, REDEMPTION, AND EXCHANGE PROCEDURES
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
As a result, when you open an account, we will ask for your name, permanent street address, date of birth, and social security or taxpayer identification number. Addresses containing a P.O. Box will not be accepted. We may also ask for other identifying documents or information.
PROSPECTUS - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Purchasing Class A and Class C Shares
You can become a shareholder in any of the funds by making the following minimum initial or additional investments.
MINIMUM MINIMUM
INITIAL ADDITIONAL
ACCOUNT TYPES INVESTMENT INVESTMENT
-------------------------------------------------------------------------------------
Retirement plan, Uniform Gift to Minors Act (UGMA)/
Uniform Transfers to Minors Act (UTMA) accounts $ 500 $ 25
All other accounts $1,000 $100
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The funds have the right to waive these minimum investment requirements for shares offered through certain institutions and for employees of the funds' advisor and its affiliates. The funds also have the right to reject any purchase order.
By Phone. You can purchase shares by calling your financial intermediary, if they have a sales agreement with the funds' distributor. You can also place purchase orders of $100 or more by calling Investor Services at 800 677-FUND. Funds will be transferred electronically from your bank account through the Automated Clearing House (ACH) network. Before making a purchase by electronic funds transfer, you must submit a new account form to the funds and elect this option. Be sure to include all of your banking information on the form.
By Wire. You can purchase shares by making a wire transfer from your bank. Before making an initial investment by wire, you must submit a new account form to the funds. After receiving your form, a service representative will contact you with your account number and wiring instructions. Your order will be priced at the next NAV calculated after the funds' custodian receives your payment by wire. Before making any additional purchases by wire, you should call Investor Services at 800 677-FUND. You cannot purchase shares by wire on days when federally chartered banks are closed.
By Mail. To purchase shares by mail, simply complete and sign a new account form, enclose a check made payable to the fund you wish to invest in, and mail both to:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
After you have established an account, you may continue to purchase shares by mailing your check to First American Funds at the same address.
Please note the following:
- All purchases must be drawn on a bank located within the United States and payable in U.S. dollars to First American Funds.
- Cash, money orders, cashier's checks for less than $10,000, third-party checks, Treasury checks, credit card checks, traveler's checks, starter checks, and credit cards will not be accepted.
- If a check does not clear your bank, the funds reserve the right to cancel the purchase, and you could be liable for any losses or fees incurred by the fund as a result of your check failing to clear.
By Systematic Investment Plan. To purchase shares as part of a savings discipline, you may add to your investment on a regular basis:
- by having $100 or more ($25 for a retirement plan or a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account) automatically withdrawn from your bank account on a periodic basis and invested in fund shares, or
- through automatic monthly exchanges of your First American fund into another First American Fund of the same class.
You may apply for participation in either of these programs through your financial intermediary or by calling Investor Services at 800 677-FUND.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Redeeming Class A and Class C Shares
When you redeem shares, the proceeds normally will be mailed or wired within three days, but in no event more than seven days, after your request is received in proper form.
By Phone. If you purchased shares through a financial intermediary, simply call them to redeem your shares.
If you did not purchase shares through a financial intermediary, you may redeem your shares by calling Investor Services at 800 677-FUND. Proceeds can be wired to your bank account (if the proceeds are at least $1,000 and you have previously supplied your bank account information to the fund) or sent to you by check. Proceeds also can be sent directly to your bank or brokerage account via electronic funds transfer if your bank or brokerage firm is a member of the ACH network. The First American Funds reserve the right to limit telephone redemptions to $50,000 per day.
If you recently purchased your shares by check or through the ACH network, proceeds from the sale of those shares may not be available until your check or ACH payment has cleared, which may take up to 15 calendar days from the date of purchase.
By Mail. To redeem shares by mail, send a written request to your financial intermediary, or to the fund at the following address:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
Your request should include the following information:
- name of the fund
- account number
- dollar amount or number of shares redeemed
- name on the account
- signatures of all registered account owners
Signatures on a written request must be guaranteed if:
- you would like redemption proceeds to be paid to anyone other than to the shareholder of record.
- you would like the redemption check mailed to an address other than the address on the fund's records, or you have changed the address on the fund's records within the last 30 days.
- your redemption request is for $50,000 or more.
- bank information related to an automatic investment plan, telephone purchase or telephone redemption is changed.
A signature guarantee assures that a signature is genuine and protects shareholders from unauthorized account transfers. Banks, savings and loan associations, trust companies, credit unions, broker-dealers, and member firms of a national securities exchange may guarantee signatures. Call your financial intermediary to determine if it has this capability. A notary public is not an acceptable signature guarantor.
Proceeds from a written redemption request will be sent to you by check unless another form of payment is requested.
By Wire. You can call or write to have redemption proceeds sent to a bank account. See the policies for redeeming shares by phone or by mail. Before requesting to have redemption proceeds sent to a bank account, please make sure the funds have your bank account information on file. If the funds do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. If the bank and fund accounts do not have at least one common owner, you must provide written instructions signed by all fund and bank account owners, and each individual must have their signature guaranteed.
By Systematic Withdrawal Plan. If your account has a value of $5,000 or more, you may redeem a specific dollar amount from your account on a regular basis. To set up systematic withdrawals, contact your financial intermediary.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
You should not make systematic withdrawals if you plan to continue investing in a fund, due to sales charges and tax liabilities.
Exchanging Class A and Class C Shares
If your investment goals or your financial needs change, you may move from one First American Fund to another First American Fund. There is no fee to exchange shares.
Generally, you may exchange your shares only for the same class of shares of the other fund, with certain exceptions, including:
- You may exchange your Class A shares for Class Y shares of the same or another First American Fund if you subsequently become eligible to purchase Class Y shares.
- If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
Exchanges are made based on the net asset value per share of each fund at the time of the exchange. When you exchange your Class A shares of one of the funds for Class A shares of another First American Fund, you do not have to pay a sales charge. When you exchange your Class C shares for Class C shares of another First American Fund, the time you held the shares of the "old" fund will be added to the time you hold the shares of the "new" fund for purposes of determining your CDSC.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
By Phone. If both funds have identical shareholder registrations, you may exchange shares by calling your financial intermediary or by calling the funds directly at 800 677-FUND.
By Mail. To exchange shares by written request, please follow the procedures under "Redeeming Class A and Class C Shares" above. Be sure to include the names of both funds involved in the exchange.
By Systematic Exchange Plan. You may add to your investment on a regular basis through automatic monthly exchanges of your First American fund into another First American Fund of the same class. You may apply for participation in this program through your financial intermediary or by calling Investor Services at 800 677-FUND.
Purchasing, Redeeming and Exchanging Class Y Shares
You may purchase or redeem shares by calling your financial intermediary. When purchasing shares, payment must be made by wire transfer, which can be arranged by your financial intermediary. You cannot purchase shares by wire on days when federally chartered banks are closed. The funds reserve the right to impose minimum investment amounts on clients of financial intermediaries that charge the funds or the advisor transaction or recordkeeping fees.
If the fund or an authorized financial intermediary receives your redemption request by 3:00 p.m. Central time, payment of your redemption proceeds will ordinarily be made by wire on the next business day. It is possible, however, that payment could be delayed by up to seven days.
Exchanging Class Y Shares. If your investment goals or your financial needs change, you may exchange your shares for Class Y shares of another First American Fund. Exchanges are made at the net asset value per share of each fund at the time of the exchange. There is no fee to exchange shares. If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
To exchange your shares, call your financial intermediary.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
ADDITIONAL INFORMATION ON PURCHASING, REDEEMING AND EXCHANGING SHARES
Calculating Net Asset Value
The funds generally calculate their NAV as of 3:00 p.m. Central time every day the New York Stock Exchange is open.
A fund's NAV is equal to the market value of its investments and other assets, less any liabilities, divided by the number of fund shares. Security valuations for the funds' investments are furnished by one or more independent pricing services that have been approved by the funds' board of directors. If market prices are not readily available for an investment or if the advisor believes they are unreliable, fair value prices may be determined in good faith using procedures approved by the funds' board of directors. Under these procedures, fair values are generally determined by a pricing committee appointed by the board of directors. The types of securities for which such fair value pricing might be required include, but are not limited to:
- Securities, including securities traded in foreign markets, where an event occurs after the close of the market in which such security principally trades, but before NAV is determined, that will affect the value of such security, or the closing value is otherwise deemed unreliable;
- Securities whose trading has been halted or suspended;
- Fixed-income securities that have gone into default and for which there is no current market value quotation; and
- Securities with limited liquidity, including certain high-yield securities or securities that are restricted as to transfer or resale.
Valuing securities at fair value involves greater reliance on judgment than valuing securities that have readily available market quotations. There can be no assurance that a fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its NAV per share.
Short-Term Trading of Fund Shares
The funds discourage purchases and redemptions of their shares in response to short-term fluctuations in the securities markets. The funds' Board of Directors has adopted policies and procedures designed to detect and deter short-term trading in the funds' shares that may disadvantage long-term fund shareholders. These policies are described below. The funds will not knowingly accommodate trading in the funds' shares in violation of these policies. As discussed below, however, there is no guarantee that the funds will be able to detect such trading in all accounts. See "Omnibus Accounts" below. These policies do not apply to purchases and sales of fund shares by other First American Funds.
Risks Associated with Short-Term Trading. Short-term trading in a fund's shares, particularly in larger amounts, may be detrimental to long-term shareholders of the fund. Depending on various factors, including the size of a fund, the amount of assets the fund typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades, and the types of securities in which the fund typically invests, short-term trading may interfere with the efficient management of the fund's portfolio, increase the fund's transaction costs, administrative costs and taxes, and/or impact the fund's performance.
In addition, the nature of a fund's portfolio holdings may allow a shareholder engaging in a short-term trading strategy to take advantage of possible delays between the change in the value of a fund's portfolio holdings and the reflection of that change in the net asset value of the fund's shares. Such a delay may occur in funds that have significant investments in foreign securities, where the value of those securities is established some time before the fund calculates its own share price, or in funds that hold significant investments in small-cap securities, high-yield (junk) bonds and other types of investments that may not be frequently traded. This type of short-term trading is sometimes referred to as "arbitrage market timing," and there is the possibility that such trading may dilute the value of fund shares if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices.
Short-Term Trading Policies. The funds' advisor monitors trading in fund shares in an effort to identify short-term trading activity that may disadvantage long-term shareholders. Only transactions that exceed a certain dollar threshold that has been determined to be potentially disruptive to the management of a fund are subject to monitoring. It is the policy of the funds to permit no more than one round trip by an investor during any 90-calendar-day period. A round trip is defined as a purchase into or redemption out of a fund (including purchases or redemptions accomplished by an exchange) paired with an opposite direction redemption out of or purchase into the same fund within 10 calendar days, in a dollar amount that exceeds the monitoring threshold. If the advisor determines that a shareholder has made more than one round trip during any 90-calendar-day period, the shareholder conducting such trading will, in less serious instances, be given an initial warning to discontinue such trading. In more serious instances (generally involving larger dollar amounts), or in the case of a second violation after an initial warning has been given, the shareholder may be temporarily or permanently barred from making future purchases into one or all of the funds or, alternatively, the funds may
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
limit the amount, number or frequency of any future purchases and/or the method by which the shareholder may request future purchases (including purchases by an exchange or transfer between a fund and any other fund). In addition to the foregoing sanctions, the funds reserve the right to reject any purchase order at any time and for any reason, without prior written notice. The funds also reserve the right to revoke the exchange privileges of any person at any time and for any reason. In making determinations concerning the rejection of purchase orders and the revocation of exchange privileges, and in considering which sanctions to impose, the funds may consider an investor's trading history in any of the First American Funds, in non-First American mutual funds, or in accounts under a person's common ownership or control.
Certain transactions are not subject to the funds' short-term trading policies. These include transactions such as systematic redemptions and purchases; retirement plan contributions, loans and distributions (including hardship withdrawals); purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations; regular portfolio re-balancings in fee-based programs of registered investment advisors, financial planners and registered broker-dealers; and similar transactions.
Omnibus Accounts. Fund shares are frequently held through omnibus account arrangements, whereby a broker-dealer, investment advisor, retirement plan sponsor or other financial intermediary maintains an omnibus account with a fund for trading on behalf of its customers. The funds seek to apply their short-term trading policies and procedures to these omnibus account arrangements and will request that the intermediary provide individual account level detail (or participant level detail in the case of retirement plans) to the funds if more than one round trip in any 90 day period is detected at the omnibus or plan level and such round trips appear to be (a) attributable to an individual shareholder or plan participant and (b) potentially detrimental to the respective fund and its shareholders based on such factors as the time between transactions, the size of the transactions and the type of fund involved. If short-term trading is detected at the individual account or participant level, the funds will request that the financial intermediary take appropriate action to curtail the activity. If the financial intermediary does not take action, the funds will take such steps as are reasonably practicable to curtail the excessive trading, including terminating the relationship with the intermediary if necessary.
While the funds will request that financial intermediaries apply the funds' short-term trading policies to their customers who invest indirectly in the funds, the funds are limited in their ability to monitor the trading activity or enforce the funds' short-term trading policies with respect to customers of financial intermediaries. For example, the funds might not be able to detect any short-term trading facilitated by a financial intermediary, if this were to occur.
Telephone Transactions
The funds and their agents will not be responsible for any losses that may result from acting on wire or telephone instructions that they reasonably believe to be genuine. The funds and their agents will each follow reasonable procedures to confirm that instructions received by telephone are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual market activity. If you are unable to reach the funds or their agents by telephone, please consider sending written instructions.
Accounts with Low Balances
If your account balance falls below $500 as a result of redeeming or exchanging shares, the funds reserve the right to either:
- deduct a $50 annual account maintenance fee, or
- close your account and send you the proceeds, less any applicable contingent deferred sales charge.
Before taking any action, however, the funds will send you written notice of the action they intend to take and give you 30 days to re-establish a minimum account balance of $500.
Redemption in Kind
Generally, proceeds from redemption requests will be paid in cash. However, to minimize the effect of large redemption requests on a fund and its remaining shareholders, each fund reserves the right to pay part or all of the proceeds from a redemption request in a proportionate share of securities in the fund instead of cash. In selecting securities for a redemption in kind, the advisor will consider the best interests of the fund and the remaining fund shareholders, and will value these securities in accordance with the pricing methods employed to calculate the fund's net asset value per share. If you receive redemption proceeds in kind, you should expect to incur transaction costs upon disposition of the securities received in the redemption. In addition, you will bear the market risk associated with these securities until their disposition.
Policies and Services
Managing Your Investment
STAYING INFORMED
Shareholder Reports
Shareholder reports are mailed twice a year. They include financial statements and performance information, and, on an annual basis, a message from your portfolio managers and the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the funds will try to limit their mailings to one report for each address that lists one or more shareholders with the same last name. If you would like additional copies, please call Investor Services at 800 677-FUND.
Statements and Confirmations
Statements summarizing activity in your account are mailed quarterly. Confirmations are mailed following each purchase or sale of fund shares, but some, such as systematic purchases and dividend reinvestments are reported on your account statement. Generally, the funds do not send statements for shares held in a brokerage account or to individuals who have their shares held in an omnibus account, such as retirement plan participants. Please review your statements and confirmations as soon as you receive them and promptly report any discrepancies to your financial intermediary or to Investor Services at 800 677-FUND.
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared daily and paid monthly. Any capital gains are distributed at least once each year. If the fund receives your wire transfer payment for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on that day. If you place an exchange order for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on the next business day. In the case of shares purchased by check, you will begin to accrue dividends on the first business day after the fund receives your check (provided your check is received by the time the fund determines its NAV).
Dividend and capital gain distributions will be reinvested in additional shares of the fund paying the distribution, unless you request that distributions be reinvested in another First American Fund or paid in cash. This request may be made on your new account form, by contacting your financial intermediary, or by calling Investor Services at 800 677-FUND. If you request that your distributions be paid in cash but those distributions cannot be delivered because of an incorrect mailing address, or if a distribution check remains uncashed for six months, the undelivered or uncashed distributions and all future distributions will be reinvested in fund shares at the current NAV.
TAXES
Some of the tax consequences of investing in the funds are discussed below. More information about taxes is in the SAI. However, because everyone's tax situation is unique, always consult your tax professional about federal, state, and local tax consequences.
Federal Taxes on Distributions
Each fund intends to meet certain federal tax requirements so that distributions of tax-exempt interest income may be treated as "exempt-interest dividends." These dividends are not subject to regular federal income tax. However, each fund may invest up to 20% of its net assets in municipal securities the interest on which is subject to the federal alternative minimum tax. Any portion of exempt-interest dividends attributable to interest on these securities may increase some shareholders' alternative minimum tax. The funds expect that their distributions will consist primarily of exempt-interest dividends. Tax Free Fund's exempt-interest dividends generally will be subject to state or local income taxes. Distributions paid from any interest income that is not tax-exempt and from any net realized capital gains will be taxable whether you reinvest those distributions or take them in cash. Distributions paid from taxable interest income will be taxed as ordinary income and not as "qualifying dividends" that are taxed at the same rate as long-term capital gains. Distributions of a fund's net long-term capital gains are taxable as long-term gains, regardless of how long you have held your shares.
Federal Taxes on Transactions
The sale of fund shares, or the exchange of one fund's shares for shares of another fund, will be a taxable event and may result in a capital gain or loss. The gain or loss will be considered long-term if you have held your shares for more than one year. A gain or loss on shares held for one year or less is considered short-term and is taxed at the same rates as ordinary income.
Policies and Services
Managing Your Investment CONTINUED
If in redemption of his or her shares a shareholder receives a distribution of securities instead of cash, the shareholder will be treated as receiving an amount equal to the fair market value of the securities at the time of the distribution for purposes of determining capital gain or loss on the redemption, and will also acquire a basis in the shares for federal income tax purposes equal to their fair market value.
The exchange of one class of shares for another class of shares in the same fund will not be taxable.
Arizona Income Taxation
Dividends paid by Arizona Tax Free Fund will be exempt from Arizona income taxes for individuals, trust, estates, and corporations to the extent they are derived from interest on Arizona municipal securities.
California Income Taxation
California Tax Free Fund intends to comply with certain state tax requirements so that dividends it pays that are attributable to interest on California municipal securities will be excluded from the California taxable income of individuals, trusts, and estates. To meet these requirements, at least 50% of the value of the fund's total assets must consist of obligations which pay interest that is exempt from California personal income tax. Exempt-interest dividends are not excluded from the California taxable income of corporations and financial institutions. In addition, dividends derived from interest paid on California municipal bonds (including securities treated for federal purposes as private activity bonds) will not be subject to the alternative minimum tax that California imposes on individuals, trusts, and estates.
Colorado Income Taxation
Dividends paid by Colorado Tax Free Fund will be exempt from Colorado income taxes for individuals, trusts, estates, and corporations to the extent that they are derived from interest on Colorado municipal securities. In addition, dividends derived from interest on Colorado municipal securities (including securities treated for federal purposes as private activity bonds) will not be subject to the alternative minimum tax that Colorado imposes on individuals, trusts, and estates.
Minnesota Income Taxation
Minnesota Tax Free Fund intends to comply with certain state tax requirements so that dividends it pays that are attributable to interest on Minnesota municipal securities will be excluded from the Minnesota taxable net income of individuals, estates, and trusts. To meet these requirements, at least 95% of the exempt-interest dividends paid by the fund must be derived from interest income on Minnesota municipal securities. A portion of the fund's dividends may be subject to the Minnesota alternative minimum tax. Exempt-interest dividends are not excluded from the Minnesota taxable income of corporations and financial institutions.
Missouri Income Taxation
Dividends paid by Missouri Tax Free Fund will be exempt from Missouri income taxes for individuals, estates, trusts, and corporations to the extent they are derived from interest on Missouri municipal obligations.
Nebraska Income Taxation
Dividends paid by Nebraska Tax Free Fund will be exempt from Nebraska income taxes for individuals, trusts, estates, and corporations to the extent they are derived from interest on Nebraska municipal obligations. A portion of the fund's dividends may be subject to the Nebraska minimum tax.
Ohio Income Taxation
Dividends paid by Ohio Tax Free Fund will be exempt from Ohio income taxes for individuals, trusts, estates, and corporations to the extent they are derived from interest on Ohio municipal obligations.
Additional Information
Management
FAF Advisors, Inc., formerly known as U.S. Bancorp Asset Management, Inc., is the funds' investment advisor. FAF Advisors provides investment management services to individuals and institutions, including corporations, foundations, pensions, and retirement plans. As of June 30, 2006, U.S. Bancorp Asset Management and its affiliates had more than $102 billion in assets under management, including investment company assets of more than $65 billion. As investment advisor, FAF Advisors manages the funds' business and investment activities, subject to the authority of the funds' board of directors.
Each fund pays the investment advisor a monthly management fee for providing investment advisory services. The table below reflects management fees paid to the investment advisor, after taking into account any fee waivers, for the funds' most recently completed fiscal period.
Management fee
as a % of average
daily net assets
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ARIZONA TAX FREE FUND %
CALIFORNIA TAX FREE FUND %
COLORADO TAX FREE FUND %
MINNESOTA TAX FREE FUND %
MISSOURI TAX FREE FUND %
NEBRASKA TAX FREE FUND %
OHIO TAX FREE FUND %
TAX FREE FUND %
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A discussion regarding the basis for the board of directors' approval of the funds' investment advisory agreement appears in the funds' annual report to shareholders for the fiscal period ended June 30, 2006.
Direct Correspondence to:
First American Funds
P.O. Box 1330
Minneapolis, MN 55440-1330
Investment Advisor
FAF Advisors, Inc.
800 Nicollet Mall
Minneapolis, MN 55402
Distributor
Quasar Distributors, LLC
615 E. Michigan Street
Milwaukee, WI 53202
ADDITIONAL COMPENSATION
FAF Advisors, U.S. Bank National Association (U.S. Bank) and other affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and other trust and agency accounts that invest in the First American Funds. As described above, FAF Advisors receives compensation for acting as the funds' investment advisor. FAF Advisors, U.S. Bank and their affiliates also receive compensation in connection with the following:
Custody Services. U.S. Bank provides custody services to the funds. U.S. Bank is paid monthly fees equal, on an annual basis, to 0.005% of each fund's average daily net assets.
Administration Services. FAF Advisors and its affiliate, U.S. Bancorp Fund Services, LLC (Fund Services), act as the funds' administrator and sub-administrator, respectively, providing administration services that include general administrative and accounting services, blue sky services and shareholder services. For such services, each fund pays FAF Advisors the fund's pro rata portion of up to 0.15% of the aggregate average daily net assets of all open-end funds in the First American family of funds. FAF Advisors pays Fund Services a portion of its fee, as agreed to from time to time. In addition, it receives from the fund 0.10% of the relevant fund's average daily net assets for providing certain shareholder services and to reimburse it for making payments to certain financial institutions that maintain and provide services to omnibus accounts.
Transfer Agency Services. Fund Services provides transfer agency and dividend disbursing services, as well as certain shareholder services, to the funds. Fund Services receives fees for transfer agency and dividend disbursing services based upon the number of share classes and shareholder accounts maintained.
Distribution Services. Quasar Distributors, LLC (Quasar), an affiliate of FAF Advisors, receives distribution and shareholder servicing fees for acting as the funds' distributor.
Other Compensation. To the extent that fund shares are held through U.S. Bank or its broker-dealer affiliate, U.S. Bancorp Investments, Inc., those entities may receive distribution and/or shareholder servicing fees from the funds' distributor as well as other payments from the funds' distributor and/or advisor as described above under "Additional Payments to Institutions."
Additional Information
Management CONTINUED
PORTFOLIO MANAGEMENT
The portfolio managers primarily responsible for the funds' management are set forth below, followed by the portfolio managers' biographies.
Arizona Tax Free Fund. Catherine M. Stienstra has served as the primary portfolio manager for the fund and Douglas J. White has co-managed the fund since February 2000.
California Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund since May 2005, and prior to that he co-managed the fund from February 2000 to May 2005. Michael S. Hamilton has co-managed the fund since May 2005, and prior to that he served as the primary portfolio manager for the fund from December 2002 to May 2005.
Colorado Tax Free Fund. Catherine M. Stienstra has served as the primary portfolio manager for the fund and Christopher L. Drahn has co-managed the fund since February 2000.
Minnesota Tax Free Fund. Douglas J. White has served as the primary portfolio manager for the fund since July 1988 and Christopher L. Drahn has co-managed the fund since February 2001.
Missouri Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund since December 2002 and Douglas J. White has co-managed the fund since September 2001.
Nebraska Tax Free Fund. Catherine M. Stienstra has served as the primary portfolio manager for the fund and Christopher L. Drahn has co-managed the fund since February 2001.
Ohio Tax Free Fund. Michael S. Hamilton has served as the primary portfolio manager for the fund since December 2002 and Christopher L. Drahn has co-managed the Fund since April 2002.
Tax Free Fund. Douglas J. White has served as the primary portfolio manager for the fund since September 2001 and Catherine M. Stienstra has co-managed the fund since October 2002.
PORTFOLIO MANAGER BIOGRAPHIES
Christopher L. Drahn, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1980. He has 26 years of financial industry experience.
Michael S. Hamilton, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1989. He has 16 years of financial industry experience, including 14 years in portfolio management.
Catherine M. Stienstra, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1990. She has 18 years of financial industry experience, including 13 years in portfolio management.
Douglas J. White, CFA, Head of Tax Exempt Fixed Income, joined U.S. Bancorp Asset Management in 1987. He has 23 years of financial industry experience, including 21 years in portfolio management.
The SAI provides additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of securities in the funds.
Additional Information
Financial Highlights
The tables that follow present performance information about the Class A, Class C, and Class Y shares of each fund. This information is intended to help you understand each fund's financial performance for the past five years or, if shorter, the period of the fund's operations. Some of this information reflects financial results for a single fund share held throughout the period. Total returns in the tables represent the rate that you would have earned or lost on an investment in the fund, excluding sales charges and assuming you reinvested all of your dividends and distributions.
The information below has been derived from the financial statements audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the funds' financial statements, is included in the funds' annual report, which is available upon request.
ARIZONA TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $11.19 $11.42 $11.33 $ 11.41 $ 10.99 $ 10.45
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.33 0.46 0.49 0.46 0.48 0.55
Realized and Unrealized Gains (Losses) on Investments (0.25) (0.07) 0.12 (0.06) 0.44 0.53
------ ------ ------ ------- ------- -------
Total From Investment Operations 0.08 0.39 0.61 0.40 0.92 1.08
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.33) (0.49) (0.47) (0.45) (0.48) (0.54)
Distributions (from net realized gains) (0.09) (0.13) (0.05) (0.03) (0.02) --
------ ------ ------ ------- ------- -------
Total Distributions (0.42) (0.62) (0.52) (0.48) (0.50) (0.54)
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.85 $11.19 $11.42 $ 11.33 $ 11.41 $ 10.99
====== ====== ====== ======= ======= =======
Total Return(2) 0.73% 3.49% 5.50% 3.61% 8.69% 10.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $9,041 $9,547 $9,008 $11,928 $12,413 $13,971
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.25%
Ratio of Net Investment Income to Average Net Assets 4.02% 4.14% 4.16% 4.03% 4.40% 5.10%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.47% 1.18% 1.12% 1.09% 1.37% 1.45%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.30% 3.71% 3.79% 3.69% 3.78% 3.90%
Portfolio Turnover Rate 47% 20% 21% 37% 30% 19%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
Arizona Tax Free Fund (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $11.18 $11.41 $11.31 $11.40 $10.98 $10.44
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.30 0.42 0.43 0.42 0.44 0.53
Realized and Unrealized Gains (Losses) on Investments (0.25) (0.08) 0.14 (0.08) 0.44 0.51
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.05 0.34 0.57 0.34 0.88 1.04
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.44) (0.42) (0.40) (0.44) (0.50)
Distributions (from net realized gains) (0.09) (0.13) (0.05) (0.03) (0.02) --
------ ------ ------ ------ ------ ------
Total Distributions (0.39) (0.57) (0.47) (0.43) (0.46) (0.50)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.84 $11.18 $11.41 $11.31 $11.40 $10.98
====== ====== ====== ====== ====== ======
Total Return(1) 0.42% 3.08% 5.17% 3.10% 8.28% 10.15%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,358 $1,628 $1,588 $1,857 $2,910 $2,003
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 0.65%
Ratio of Net Investment Income to Average Net Assets 3.62% 3.74% 3.76% 3.63% 4.00% 4.66%
Ratio of Expenses to Average Net Assets (excluding
waivers) 2.22% 1.93% 1.87% 1.84% 2.12% 1.84%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 2.55% 2.96% 3.04% 2.94% 3.03% 3.47%
Portfolio Turnover Rate 47% 20% 21% 37% 30% 19%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.19 $ 11.43 $11.33 $11.41 $ 10.99 $10.45
------- ------- ------ ------ ------- ------
Investment Operations:
Net Investment Income 0.35 0.50 0.50 0.48 0.51 0.57
Realized and Unrealized Gains (Losses) on
Investments (0.25) (0.09) 0.15 (0.06) 0.44 0.53
------- ------- ------ ------ ------- ------
Total From Investment Operations 0.10 0.41 0.65 0.42 0.95 1.10
------- ------- ------ ------ ------- ------
Less Distributions:
Dividends (from net investment income) (0.35) (0.52) (0.50) (0.47) (0.51) (0.56)
Distributions (from net realized gains) (0.09) (0.13) (0.05) (0.03) (0.02) --
------- ------- ------ ------ ------- ------
Total Distributions (0.44) (0.65) (0.55) (0.50) (0.53) (0.56)
------- ------- ------ ------ ------- ------
Net Asset Value, End of Period $ 10.85 $ 11.19 $11.43 $11.33 $ 11.41 $10.99
======= ======= ====== ====== ======= ======
Total Return(2) 0.92% 3.65% 5.85% 3.86% 8.95% 10.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $15,614 $14,035 $9,520 $9,244 $10,656 $5,822
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% --
Ratio of Net Investment Income to Average Net
Assets 4.27% 4.39% 4.42% 4.28% 4.64% 5.33%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.22% 0.93% 0.87% 0.84% 1.12% 1.19%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.55% 3.96% 4.05% 3.94% 4.02% 4.14%
Portfolio Turnover Rate 47% 20% 21% 37% 30% 19%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
CALIFORNIA TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.24 $ 11.40 $11.40 $ 11.63 $ 11.17 $ 10.66
------- ------- ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.33 0.44 0.46 0.47 0.48 0.52
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.05) 0.08 (0.16) 0.50 0.50
------- ------- ------ ------- ------- -------
Total From Investment Operations 0.07 0.39 0.54 0.31 0.98 1.02
------- ------- ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.33) (0.44) (0.46) (0.47) (0.47) (0.51)
Distributions (from net realized gains) (0.02) (0.11) (0.08) (0.07) (0.05) --
------- ------- ------ ------- ------- -------
Total Distributions (0.35) (0.55) (0.54) (0.54) (0.52) (0.51)
------- ------- ------ ------- ------- -------
Net Asset Value, End of Period $ 10.96 $ 11.24 $11.40 $ 11.40 $ 11.63 $ 11.17
======= ======= ====== ======= ======= =======
Total Return(2) 0.63% 3.50% 4.93% 2.85% 9.10% 9.73%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $10,783 $11,888 $9,513 $11,143 $12,954 $18,139
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.25%
Ratio of Net Investment Income to Average
Net Assets 3.99% 3.88% 4.03% 4.16% 4.26% 4.75%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.34% 1.15% 1.09% 1.08% 1.31% 1.35%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.40% 3.48% 3.69% 3.83% 3.70% 3.65%
Portfolio Turnover Rate 24% 14% 16% 20% 33% 19%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.25 $11.41 $11.41 $11.64 $11.18 $10.66
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.30 0.40 0.41 0.43 0.42 0.47
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.05) 0.09 (0.16) 0.52 0.51
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.04 0.35 0.50 0.27 0.94 0.98
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.40) (0.42) (0.43) (0.43) (0.46)
Distributions (from net realized gains) (0.02) (0.11) (0.08) (0.07) (0.05) --
------ ------ ------ ------ ------ ------
Total Distributions (0.32) (0.51) (0.50) (0.50) (0.48) (0.46)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.97 $11.25 $11.41 $11.41 $11.64 $11.18
====== ====== ====== ====== ====== ======
Total Return(2) 0.33% 3.11% 4.52% 2.45% 8.69% 9.42%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $3,592 $3,068 $1,294 $1,101 $1,115 $ 647
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 0.65%
Ratio of Net Investment Income to Average Net
Assets 3.60% 3.47% 3.65% 3.75% 3.86% 4.38%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.09% 1.90% 1.84% 1.83% 2.06% 1.75%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.66% 2.72% 2.96% 3.07% 2.95% 3.28%
Portfolio Turnover Rate 24% 14% 16% 20% 33% 19%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
CALIFORNIA TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.25 $ 11.40 $ 11.40 $ 11.63 $ 11.17 $10.66
------- ------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.35 0.47 0.48 0.49 0.49 0.54
Realized and Unrealized Gains (Losses)
on Investments (0.26) (0.04) 0.09 (0.15) 0.52 0.50
------- ------- ------- ------- ------- ------
Total From Investment Operations 0.09 0.43 0.57 0.34 1.01 1.04
------- ------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.35) (0.47) (0.49) (0.50) (0.50) (0.53)
Distributions (from net realized gains) (0.02) (0.11) (0.08) (0.07) (0.05) --
------- ------- ------- ------- ------- ------
Total Distributions (0.37) (0.58) (0.57) (0.57) (0.55) (0.53)
------- ------- ------- ------- ------- ------
Net Asset Value, End of Period $ 10.97 $ 11.25 $ 11.40 $ 11.40 $ 11.63 $11.17
======= ======= ======= ======= ======= ======
Total Return(2) 0.82% 3.85% 5.19% 3.11% 9.36% 9.99%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $21,767 $19,556 $16,047 $15,243 $11,853 $6,726
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% --
Ratio of Net Investment Income to Average
Net Assets 4.24% 4.12% 4.29% 4.40% 4.51% 5.00%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.09% 0.90% 0.84% 0.83% 1.06% 1.10%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.65% 3.72% 3.95% 4.07% 3.95% 3.90%
Portfolio Turnover Rate 24% 14% 16% 20% 33% 19%
-------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
COLORADO TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.30 $11.52 $ 11.57 $ 11.65 $ 11.09 $ 10.42
------ ------ ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.35 0.49 0.51 0.50 0.48 0.54
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.11) 0.02 (0.10) 0.56 0.66
------ ------ ------- ------- ------- -------
Total From Investment Operations 0.09 0.38 0.53 0.40 1.04 1.20
------ ------ ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.34) (0.51) (0.50) (0.48) (0.47) (0.53)
Distributions (from net realized gains) (0.32) (0.09) (0.08) -- (0.01) --
------ ------ ------- ------- ------- -------
Total Distributions (0.66) (0.60) (0.58) (0.48) (0.48) (0.53)
------ ------ ------- ------- ------- -------
Net Asset Value, End of Period $10.73 $11.30 $ 11.52 $ 11.57 $ 11.65 $ 11.09
====== ====== ======= ======= ======= =======
Total Return(2) 0.77% 3.36% 4.71% 3.53% 9.72% 11.78%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $8,507 $8,362 $10,598 $13,843 $19,633 $20,550
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.25%
Ratio of Net Investment Income to Average
Net Assets 4.30% 4.23% 4.25% 4.23% 4.32% 5.03%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.52% 1.18% 1.09% 1.07% 1.30% 1.42%
Ratio of Net Investment Income to Average
Net Assets
(excluding waivers) 3.53% 3.80% 3.91% 3.91% 3.77% 3.86%
Portfolio Turnover Rate 35% 30% 12% 14% 22% 23%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
COLORADO TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.28 $11.50 $11.56 $11.63 $11.08 $10.41
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.32 0.43 0.44 0.44 0.44 0.49
Realized and Unrealized Gains (Losses) on
Investments (0.27) (0.10) 0.03 (0.08) 0.56 0.67
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.05 0.33 0.47 0.36 1.00 1.16
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.46) (0.45) (0.43) (0.44) (0.49)
Distributions (from net realized gains) (0.32) (0.09) (0.08) -- (0.01) --
------ ------ ------ ------ ------ ------
Total Distributions (0.62) (0.55) (0.53) (0.43) (0.45) (0.49)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.71 $11.28 $11.50 $11.56 $11.63 $11.08
====== ====== ====== ====== ====== ======
Total Return(2) 0.47% 2.95% 4.21% 3.23% 9.23% 11.41%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $3,007 $3,423 $3,787 $4,284 $3,705 $1,698
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 0.65%
Ratio of Net Investment Income to Average Net
Assets 3.90% 3.83% 3.85% 3.83% 3.95% 4.61%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.27% 1.93% 1.84% 1.82% 2.05% 1.82%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.78% 3.05% 3.16% 3.16% 3.05% 3.44%
Portfolio Turnover Rate 35% 30% 12% 14% 22% 23%
-------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.32 $11.53 $11.59 $11.67 $11.10 $10.43
------- ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.37 0.51 0.52 0.51 0.48 0.58
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.09) 0.03 (0.09) 0.60 0.64
------- ------ ------ ------ ------ ------
Total From Investment Operations 0.11 0.42 0.55 0.42 1.08 1.22
------- ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.36) (0.54) (0.53) (0.50) (0.50) (0.55)
Distributions (from net realized gains) (0.32) (0.09) (0.08) -- (0.01) --
------- ------ ------ ------ ------ ------
Total Distributions (0.68) (0.63) (0.61) (0.50) (0.51) (0.55)
------- ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 10.75 $11.32 $11.53 $11.59 $11.67 $11.10
======= ====== ====== ====== ====== ======
Total Return(2) 0.96% 3.70% 4.87% 3.78% 10.07% 12.02%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $10,181 $8,363 $9,439 $9,516 $9,244 $1,923
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% --
Ratio of Net Investment Income to Average Net
Assets 4.58% 4.48% 4.51% 4.49% 4.59% 5.32%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.27% 0.93% 0.84% 0.82% 1.05% 1.18%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.81% 4.05% 4.17% 4.17% 4.04% 4.14%
Portfolio Turnover Rate 35% 30% 12% 14% 22% 23%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
MINNESOTA TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.21 $ 11.23 $ 11.34 $ 11.39 $ 11.06 $ 10.64
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.35 0.45 0.44 0.48 0.47 0.53
Realized and Unrealized Gains
(Losses) on Investments (0.21) 0.03 (0.01) (0.05) 0.34 0.43
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.14 0.48 0.43 0.43 0.81 0.96
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income) (0.35) (0.45) (0.45) (0.45) (0.47) (0.54)
Distributions (from net realized
gains) (0.03) (0.05) (0.09) (0.03) (0.01) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.38) (0.50) (0.54) (0.48) (0.48) (0.54)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.97 $ 11.21 $ 11.23 $ 11.34 $ 11.39 $ 11.06
======== ======== ======== ======== ======== ========
Total Return(2) 1.28% 4.42% 3.94% 3.90% 7.23% 9.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $101,142 $106,783 $114,981 $125,916 $135,607 $107,260
Ratio of Expenses to Average Net
Assets 0.95% 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.15% 4.04% 3.87% 4.25% 4.22% 4.84%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.10% 1.06% 1.05% 1.06% 1.09% 1.18%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 4.00% 3.93% 3.77% 4.14% 4.08% 4.61%
Portfolio Turnover Rate 11% 16% 25% 23% 26% 15%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.17 $11.19 $ 11.31 $ 11.36 $ 11.04 $10.62
------- ------ ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.31 0.41 0.39 0.43 0.43 0.49
Realized and Unrealized Gains (Losses) on
Investments (0.20) 0.03 (0.01) (0.04) 0.33 0.43
------- ------ ------- ------- ------- ------
Total From Investment Operations 0.11 0.44 0.38 0.39 0.76 0.92
------- ------ ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.32) (0.41) (0.41) (0.41) (0.43) (0.50)
Distributions (from net realized gains) (0.03) (0.05) (0.09) (0.03) (0.01) --
------- ------ ------- ------- ------- ------
Total Distributions (0.35) (0.46) (0.50) (0.44) (0.44) (0.50)
------- ------ ------- ------- ------- ------
Net Asset Value, End of Period $ 10.93 $11.17 $ 11.19 $ 11.31 $ 11.36 $11.04
======= ====== ======= ======= ======= ======
Total Return(2) 0.98% 4.02% 3.45% 3.51% 7.10% 8.88%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $10,359 $9,841 $10,387 $11,951 $11,703 $6,382
Ratio of Expenses to Average Net Assets 1.35% 1.35% 1.35% 1.35% 1.35% 1.35%
Ratio of Net Investment Income to Average Net
Assets 3.75% 3.64% 3.47% 3.85% 3.80% 4.39%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.85% 1.81% 1.80% 1.81% 1.84% 1.58%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.25% 3.18% 3.02% 3.39% 3.31% 4.16%
Portfolio Turnover Rate 11% 16% 25% 23% 26% 15%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
MINNESOTA TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.20 $ 11.22 $ 11.33 $ 11.38 $ 11.05 $ 10.63
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.36 0.48 0.47 0.51 0.49 0.55
Realized and Unrealized Gains (Losses) on
Investments (0.20) 0.03 (0.01) (0.05) 0.35 0.44
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.16 0.51 0.46 0.46 0.84 0.99
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.37) (0.48) (0.48) (0.48) (0.50) (0.57)
Distributions (from net realized gains) (0.03) (0.05) (0.09) (0.03) (0.01) --
------- ------- ------- ------- ------- -------
Total Distributions (0.40) (0.53) (0.57) (0.51) (0.51) (0.57)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.96 $ 11.20 $ 11.22 $ 11.33 $ 11.38 $ 11.05
======= ======= ======= ======= ======= =======
Total Return(2) 1.47% 4.69% 4.20% 4.16% 7.84% 9.52%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $48,760 $46,471 $42,900 $47,858 $54,638 $49,078
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average
Net Assets 4.40% 4.29% 4.12% 4.50% 4.47% 5.09%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.85% 0.81% 0.80% 0.81% 0.84% 0.93%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 4.25% 4.18% 4.02% 4.39% 4.33% 4.86%
Portfolio Turnover Rate 11% 16% 25% 23% 26% 15%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
MISSOURI TAX FREE FUND(1)
Fiscal period
ended Fiscal period ended September 30,
CLASS A SHARES June 30, 2006(2) 2005 2004 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 12.14 $ 12.32 $ 12.37 $ 12.47 $ 12.05 $ 11.54
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.34 0.45 0.45 0.45 0.46 0.46
Realized and Unrealized gains (Losses) on
Investments (0.29) (0.12) (0.02) (0.04) 0.47 0.50
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.05 0.33 0.43 0.41 0.93 0.96
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.34) (0.45) (0.45) (0.45) (0.47) (0.44)
Distributions (from net realized gains) (0.09) (0.06) (0.03) (0.06) (0.04) (0.01)
------- ------- ------- ------- ------- -------
Total Distributions (0.43) (0.51) (0.48) (0.51) (0.51) (0.45)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 11.76 $ 12.14 $ 12.32 $ 12.37 $ 12.47 $ 12.05
======= ======= ======= ======= ======= =======
Total Return(4) 0.38% 2.74% 3.60% 3.45% 7.99% 8.44%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $26,972 $30,188 $27,114 $28,141 $26,496 $22,573
Ratio of Expenses to Average Net Assets 0.95% 0.95% 0.95% 0.95% 0.95% 0.94%
Ratio of Net Investment Income to Average Net
Assets 3.74% 3.65% 3.68% 3.69% 3.81% 4.23%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.09% 1.06% 1.05% 1.06% 1.06% 1.00%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.60% 3.54% 3.58% 3.58% 3.70% 4.17%
Portfolio Turnover Rate 20% 19% 15% 20% 25% 9%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar Missouri Tax-Exempt Bond Fund, which merged into the Missouri Tax Free Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the
fund's fiscal year end changed from October 31 to September 30. All ratios
for the period have been annualized, except total return and portfolio
turnover.
(4)Total return does not reflect sales charges. Total return would have been
lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
MISSOURI TAX FREE FUND(1) (CONTINUED)
Fiscal period
ended Fiscal period ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $12.12 $12.29 $12.35 $12.46 $12.05 $12.03
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.30 0.40 0.40 0.40 0.41 --
Realized and Unrealized Gains (Losses) on
Investments (0.30) (0.11) (0.03) (0.04) 0.48 0.02
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.00 0.29 0.37 0.36 0.89 0.02
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.40) (0.40) (0.41) (0.44) --
Distributions (from net realized gains) (0.09) (0.06) (0.03) (0.06) (0.04) --
------ ------ ------ ------ ------ ------
Total Distributions (0.39) (0.46) (0.43) (0.47) (0.48) --
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $11.73 $12.12 $12.29 $12.35 $12.46 $12.05
====== ====== ====== ====== ====== ======
Total Return(3) 0.00% 2.42% 3.11% 3.05% 7.58% 0.17%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 214 $ 190 $ 218 $ 279 $ 21 $ --
Ratio of Expenses to Average Net Assets 1.35% 1.35% 1.35% 1.35% 1.35% --
Ratio of Net Investment Income to Average Net
Assets 3.34% 3.25% 3.28% 3.30% 3.28% --
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.84% 1.81% 1.80% 1.81% 1.81% --
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.85% 2.79% 2.83% 2.84% 2.82% --
Portfolio Turnover Rate 20% 19% 15% 20% 25% 9%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Class C shares have been offered since September 24, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(2) 2005 2004 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 12.15 $ 12.32 $ 12.38 $ 12.48 $ 12.06 $ 11.55
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.36 0.48 0.48 0.49 0.48 0.49
Realized and Unrealized Gains
(Losses) on Investments (0.30) (0.11) (0.03) (0.05) 0.48 0.50
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.06 0.37 0.45 0.44 0.96 0.99
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income) (0.36) (0.48) (0.48) (0.48) (0.50) (0.47)
Distributions (from net realized
gains) (0.09) (0.06) (0.03) (0.06) (0.04) (0.01)
-------- -------- -------- -------- -------- --------
Total Distributions (0.45) (0.54) (0.51) (0.54) (0.54) (0.48)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 11.76 $ 12.15 $ 12.32 $ 12.38 $ 12.48 $ 12.06
======== ======== ======== ======== ======== ========
Total Return(4) 0.49% 3.08% 3.77% 3.71% 8.25% 8.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $138,394 $151,710 $152,676 $168,094 $142,344 $129,715
Ratio of Expenses to Average Net
Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.69%
Ratio of Net Investment Income to
Average Net Assets 3.99% 3.90% 3.93% 3.94% 4.06% 4.48%
Ratio of Expenses to Average Net
Assets (excluding waivers) 0.84% 0.81% 0.80% 0.81% 0.81% 0.75%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.85% 3.79% 3.83% 3.83% 3.95% 4.42%
Portfolio Turnover Rate 20% 19% 15% 20% 25% 9%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar Missouri Tax-Exempt Bond Fund, which merged into the Missouri Tax Free Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed from October 31 to September 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
NEBRASKA TAX FREE FUND
Fiscal period
ended Fiscal period ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.58 $10.66 $10.66 $10.70 $10.20 $10.00
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.31 0.39 0.41 0.41 0.41 0.24
Realized and Unrealized Gains (Losses) on
Investments (0.24) (0.05) 0.03 (0.04) 0.49 0.20
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.07 0.34 0.44 0.37 0.90 0.44
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.30) (0.42) (0.40) (0.40) (0.40) (0.24)
Distributions (from net realized gains) (0.02) -- (0.04) (0.01) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.32) (0.42) (0.44) (0.41) (0.40) (0.24)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.33 $10.58 $10.66 $10.66 $10.70 $10.20
====== ====== ====== ====== ====== ======
Total Return(3) 0.65% 3.20% 4.18% 3.57% 9.09% 4.48%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,910 $7,136 $4,925 $4,869 $4,904 $5,090
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.55%
Ratio of Net Investment Income to Average Net
Assets 3.89% 3.78% 3.82% 3.87% 3.98% 4.12%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.30% 1.12% 1.08% 1.07% 1.29% 1.38%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.34% 3.41% 3.49% 3.55% 3.44% 3.29%
Portfolio Turnover Rate 35% 21% 17% 15% 35% 30%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on February 28, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal period ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.50 $10.58 $10.58 $10.63 $10.14 $10.00
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.27 0.35 0.35 0.36 0.36 0.20
Realized and Unrealized Gains (Losses) on
Investments (0.22) (0.06) 0.04 (0.04) 0.50 0.17
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.05 0.29 0.39 0.32 0.86 0.37
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.27) (0.37) (0.35) (0.36) (0.37) (0.23)
Distributions (from net realized gains) (0.02) -- (0.04) (0.01) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.29) (0.37) (0.39) (0.37) (0.37) (0.23)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.26 $10.50 $10.58 $10.58 $10.63 $10.14
====== ====== ====== ====== ====== ======
Total Return(3) 0.46% 2.81% 3.80% 3.10% 8.66% 3.71%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,487 $1,565 $1,861 $1,657 $ 982 $ 226
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 0.95%
Ratio of Net Investment Income to Average Net
Assets 3.49% 3.38% 3.42% 3.46% 3.57% 3.73%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.05% 1.87% 1.83% 1.82% 2.04% 1.75%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.59% 2.66% 2.74% 2.79% 2.68% 2.93%
Portfolio Turnover Rate 35% 21% 17% 15% 35% 30%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on February 28, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
NEBRASKA TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001(2)
--------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.58 $ 10.66 $ 10.65 $ 10.69 $ 10.19 $ 10.00
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.32 0.43 0.43 0.43 0.43 0.26
Realized and Unrealized Gains (Losses) on
Investments (0.23) (0.07) 0.04 (0.03) 0.50 0.19
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.09 0.36 0.47 0.40 0.93 0.45
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.32) (0.44) (0.42) (0.43) (0.43) (0.26)
Distributions (from net realized gains) (0.02) -- (0.04) (0.01) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.34) (0.44) (0.46) (0.44) (0.43) (0.26)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.33 $ 10.58 $ 10.66 $ 10.65 $ 10.69 $ 10.19
======= ======= ======= ======= ======= =======
Total Return(3) 0.85% 3.45% 4.54% 3.82% 9.37% 4.51%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $31,347 $32,418 $29,722 $28,120 $27,348 $22,443
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.30%
Ratio of Net Investment Income to Average Net
Assets 4.14% 4.03% 4.07% 4.11% 4.22% 4.36%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.05% 0.87% 0.83% 0.82% 1.04% 1.13%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.59% 3.66% 3.74% 3.79% 3.68% 3.53%
Portfolio Turnover Rate 35% 21% 17% 15% 35% 30%
--------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on February 28, 2001. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return would have been lower had certain expenses not been waived.
OHIO TAX FREE FUND
Fiscal period
ended Fiscal period ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002(2)
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.42 $10.52 $10.54 $10.58 $10.00
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.29 0.36 0.36 0.36 0.15
Realized and Unrealized Gains (Losses) on Investments (0.25) (0.06) 0.07 (0.03) 0.59
------ ------ ------ ------ ------
Total From Investment Operations 0.04 0.30 0.43 0.33 0.74
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.28) (0.36) (0.35) (0.37) (0.16)
Distributions (from net realized gains) (0.01) (0.04) (0.10) -- --
------ ------ ------ ------ ------
Total Distributions (0.29) (0.40) (0.45) (0.37) (0.16)
------ ------ ------ ------ ------
Net Asset Value, End of Period $10.17 $10.42 $10.52 $10.54 $10.58
====== ====== ====== ====== ======
Total Return(3) 0.40% 2.86% 4.16% 3.22% 7.42%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 841 $ 988 $1,200 $ 849 $ 453
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net Assets 3.60% 3.41% 3.43% 3.52% 3.25%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.28% 1.11% 1.08% 1.09% 1.23%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.07% 3.05% 3.10% 3.18% 2.77%
Portfolio Turnover Rate 11% 13% 19% 22% 3%
-------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on April 30, 2002. All ratios for the period have been
annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been
lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
OHIO TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal period ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002(2)
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.32 $10.41 $10.44 $10.57 $10.00
------- ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.25 0.32 0.29 0.32 0.13
Realized and Unrealized Gains (Losses) on Investments (0.26) (0.05) 0.09 (0.12) 0.58
------- ------ ------ ------ ------
Total From Investment Operations (0.01) 0.27 0.38 0.20 0.71
------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.25) (0.32) (0.31) (0.33) (0.14)
Distributions (from net realized gains) (0.01) (0.04) (0.10) -- --
------- ------ ------ ------ ------
Total Distributions (0.26) (0.36) (0.41) (0.33) (0.14)
------- ------ ------ ------ ------
Net Asset Value, End of Period $ 10.05 $10.32 $10.41 $10.44 $10.57
======= ====== ====== ====== ======
Total Return(3) (0.08)% 2.58% 3.69% 1.95% 7.13%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 209 $ 174 $ 120 $ 215 $ 1
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to Average Net Assets 3.22% 3.01% 3.03% 3.08% 3.01%
Ratio of Expenses to Average Net Assets (excluding waivers) 2.03% 1.86% 1.83% 1.84% 1.98%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 2.34% 2.30% 2.35% 2.39% 2.18%
Portfolio Turnover Rate 11% 13% 19% 22% 3%
-------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on April 30, 2002. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.43 $ 10.53 $ 10.55 $ 10.57 $ 10.00
------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.30 0.38 0.38 0.39 0.16
Realized and Unrealized Gains (Losses) on Investments (0.25) (0.05) 0.07 (0.02) 0.58
------- ------- ------- ------- -------
Total From Investment Operations 0.05 0.33 0.45 0.37 0.74
------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.30) (0.39) (0.37) (0.39) (0.17)
Distributions (from net realized gains) (0.01) (0.04) (0.10) -- --
------- ------- ------- ------- -------
Total Distributions (0.31) (0.43) (0.47) (0.39) (0.17)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.17 $ 10.43 $ 10.53 $ 10.55 $ 10.57
======= ======= ======= ======= =======
Total Return(3) 0.49% 3.12% 4.42% 3.65% 7.41%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $40,606 $41,104 $39,240 $39,465 $38,083
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to Average Net Assets 3.85% 3.66% 3.68% 3.78% 3.74%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.03% 0.86% 0.82% 0.84% 0.98%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.32% 3.30% 3.36% 3.44% 3.26%
Portfolio Turnover Rate 11% 13% 19% 22% 3%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Commenced operations on April 30, 2002. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
TAX FREE FUND(1)
Fiscal period
ended Fiscal period ended September 30,
CLASS A SHARES June 30, 2006(2) 2005 2004 2003 2002 2001(3)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.10 $ 11.18 $ 11.28 $ 11.44 $ 10.99 $ 10.53
------- ------- ------- ------- ------- -------
Income From Investment Operations:
Net Investment Income 0.35 0.47 0.47 0.47 0.47 0.42
Realized and Unrealized Gains (Losses) on
Investments (0.20) 0.03 0.02 (0.03) 0.44 0.43
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.15 0.50 0.49 0.44 0.91 0.85
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.35) (0.47) (0.48) (0.47) (0.46) (0.39)
Distributions (from net realized gains) (0.04) (0.11) (0.11) (0.13) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.39) (0.58) (0.59) (0.60) (0.46) (0.39)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.86 $ 11.10 $ 11.18 $ 11.28 $ 11.44 $ 10.99
======= ======= ======= ======= ======= =======
Total Return(4) 1.37% 4.51% 4.45% 4.06% 8.56% 8.22%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $36,519 $38,205 $40,156 $42,942 $43,708 $48,769
Ratio of Expenses to Average Net Assets 0.95% 0.95% 0.95% 0.95% 0.95% 1.16%
Ratio of Net Investment Income to Average
Net Assets 4.28% 4.20% 4.18% 4.21% 4.20% 4.27%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.06% 1.06% 1.05% 1.05% 1.02% 1.18%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 4.17% 4.09% 4.08% 4.11% 4.13% 4.25%
Portfolio Turnover Rate 13% 8% 23% 23% 39% 3%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar National Municipal Bond Fund, which merged into the Tax Free Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end changed from October 31 to September 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal period ended September 30,
CLASS C SHARES June 30, 2006(1) 2005 2004 2003 2002 2001(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.05 $11.13 $11.24 $11.40 $10.96 $10.93
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.32 0.42 0.43 0.42 0.42 0.01
Realized and Unrealized Gains (Losses) on
Investments (0.20) 0.03 -- (0.02) 0.45 0.02
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.12 0.45 0.43 0.40 0.87 0.03
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.32) (0.42) (0.43) (0.43) (0.43) --
Distributions (from net realized gains) (0.04) (0.11) (0.11) (0.13) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.36) (0.53) (0.54) (0.56) (0.43) --
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.81 $11.05 $11.13 $11.24 $11.40 $10.96
====== ====== ====== ====== ====== ======
Total Return(3) 1.06% 4.13% 3.92% 3.67% 8.14% 0.27%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,210 $2,712 $2,682 $4,880 $6,199 $4,494
Ratio of Expenses to Average Net Assets 1.35% 1.35% 1.35% 1.35% 1.35% 1.04%
Ratio of Net Investment Income to Average Net
Assets 3.87% 3.80% 3.77% 3.81% 3.82% 5.61%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.81% 1.81% 1.80% 1.80% 1.77% 1.04%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.41% 3.34% 3.32% 3.36% 3.40% 5.61%
Portfolio Turnover Rate 13% 8% 23% 23% 39% 3%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in
2006, the fund's fiscal year end was changed from September 30 to June 30.
All ratios for the period have been annualized, except total return and
portfolio turnover.
(2)Class C shares have been offered since September 24, 2001. All ratios for the
period have been annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been
lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
TAX FREE FUND (CONTINUED)
Fiscal period
ended Fiscal period ended September 30,
CLASS Y SHARES June 30, 2006(2) 2005 2004 2003 2002 2001(3)
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of
Period $ 11.11 $ 11.19 $ 11.29 $ 11.45 $ 11.00 $ 10.53
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.37 0.50 0.50 0.50 0.49 0.44
Realized and Unrealized Gains
(Losses) on Investments (0.20) 0.02 0.01 (0.03) 0.45 0.45
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.17 0.52 0.51 0.47 0.94 0.89
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income) (0.37) (0.49) (0.50) (0.50) (0.49) (0.42)
Distributions (from net realized
gains) (0.04) (0.11) (0.11) (0.13) -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.41) (0.60) (0.61) (0.63) (0.49) (0.42)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.87 $ 11.11 $ 11.19 $ 11.29 $ 11.45 $ 11.00
======== ======== ======== ======== ======== ========
Total Return(4) 1.57% 4.77% 4.71% 4.31% 8.84% 8.59%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $455,910 $436,303 $416,651 $460,634 $497,140 $501,361
Ratio of Expenses to Average Net
Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.73%
Ratio of Net Investment Income to
Average Net Assets 4.53% 4.45% 4.43% 4.46% 4.47% 4.32%
Ratio of Expenses to Average Net
Assets (excluding waivers) 0.81% 0.81% 0.80% 0.80% 0.77% 0.74%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 4.42% 4.34% 4.33% 4.36% 4.40% 4.31%
Portfolio Turnover Rate 13% 8% 23% 23% 39% 3%
------------------------------------------------------------------------------------------------------------------------------
|
(1)The financial highlights prior to September 24, 2001 are those of the Firstar National Municipal Bond Fund, which merged into the Tax Free Fund on that date.
(2)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(3)For the period November 1, 2000 to September 30, 2001. Effective in 2001, the fund's fiscal year end was changed from October 31 to September 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(4)Total return would have been lower had certain expenses not been waived.
(FIRST AMERICAN FUNDS LOGO)
FOR MORE INFORMATION
More information about the First American Funds is available on the funds' Internet site at www.firstamericanfunds.com and in the following documents:
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds' annual and semiannual reports to shareholders. In the funds' annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies and is incorporated into this prospectus by reference (which means that it is legally part of this prospectus).
You can obtain a free copy of the funds' most recent annual or semiannual reports or the SAI, request other information about the funds, or make other shareholder inquiries by calling Investor Services at 800 677-3863 (FUND) or by contacting the funds at the address below. Annual or semiannual reports and the SAI are also available on the funds' Internet site.
Information about the funds (including the SAI) can also be reviewed and copied at the Securities and Exchange Commission's (SEC) Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the funds are also available on the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, DC 20549-0102.
FIRST AMERICAN FUNDS
P.O. Box 1330
Minneapolis, MN 55440-1330
October 30, 2006
Prospectus
First American Investment Funds, Inc.
ASSET CLASS - BOND FUNDS
SHORT & INTERMEDIATE
TAX FREE INCOME
FUNDS
CLASS A AND CLASS Y SHARES
CALIFORNIA INTERMEDIATE TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
INTERMEDIATE TAX FREE FUND
MINNESOTA INTERMEDIATE TAX FREE FUND
OREGON INTERMEDIATE TAX FREE FUND
SHORT TAX FREE FUND
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the shares
of these funds, or determined if the
information in this prospectus is
accurate or complete. Any statement to
the contrary is a criminal offense.
(FIRST AMERICAN FUNDS LOGO)
TABLE OF
CONTENTS
FUND SUMMARIES
California Intermediate Tax Free Fund 3
Colorado Intermediate Tax Free Fund 4
Intermediate Tax Free Fund 5
Minnesota Intermediate Tax Free Fund 6
Oregon Intermediate Tax Free Fund 7
Short Tax Free Fund 8
MORE ABOUT THE FUNDS
Investment Strategies, Risks and Other Investment
Matters 11
POLICIES AND SERVICES
Purchasing, Redeeming, and Exchanging Shares 13
Managing Your Investment 23
ADDITIONAL INFORMATION
Management 25
Financial Highlights 27
FOR MORE INFORMATION Back Cover
|
Fund Summaries
Introduction
This section of the prospectus describes the objectives of the First American Short & Intermediate Tax Free Funds, summarizes the principal investment strategies used by each fund in trying to achieve its objective, and highlights the risks involved with these strategies. It also provides you with information about the performance, fees, and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS PROSPECTUS AND THE RELATED STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES IN THE FUNDS, NOR SHALL ANY SUCH SHARES BE OFFERED OR SOLD TO ANY PERSON IN ANY JURISDICTION IN WHICH AN OFFER, SOLICITATION, PURCHASE, OR SALE WOULD BE UNLAWFUL UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
Fund Summaries
Fund Summaries
This section summarizes the investment objectives and principal strategies and risks of investing in First American Short & Intermediate Tax Free Funds. California Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund are referred to in this prospectus as "state-specific funds." You will find more specific information about each fund in the pages that follow.
INVESTMENT OBJECTIVES
The funds have the following investment objectives:
CALIFORNIA INTERMEDIATE TAX FREE FUND -- providing current income that is exempt from both federal income tax and California state income tax to the extent consistent with preservation of capital.
COLORADO INTERMEDIATE TAX FREE FUND -- providing current income that is exempt from both federal income tax and Colorado state income tax to the extent consistent with preservation of capital.
INTERMEDIATE TAX FREE FUND -- providing current income that is exempt from federal income tax to the extent consistent with preservation of capital.
MINNESOTA INTERMEDIATE TAX FREE FUND -- providing current income that is exempt from both federal income tax and Minnesota state income tax to the extent consistent with preservation of capital.
OREGON INTERMEDIATE TAX FREE FUND -- providing current income that is exempt from both federal income tax and Oregon state income tax to the extent consistent with preservation of capital.
SHORT TAX FREE FUND -- providing current income that is exempt from federal income tax to the extent consistent with preservation of capital.
PRINCIPAL STRATEGIES
Under normal market conditions, each fund invests at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in municipal securities that pay interest that is exempt from federal and, for the state-specific funds, applicable state income tax, including federal and, for the state-specific funds (except Oregon Intermediate Tax Free Fund), state alternative minimum tax.
Each fund normally may invest up to 20% of its net assets in taxable obligations, including obligations the interest on which is subject to federal and, for the state-specific funds (except Oregon Intermediate Tax Free Fund), applicable state alternative minimum tax.
Each fund may invest in:
- "general obligation" bonds;
- "revenue" bonds;
- participation interests in municipal leases;
- zero coupon municipal securities; and
- inverse floating rate municipal securities (up to 10% of each fund's total assets).
Each fund invests mainly in securities that, at the time of purchase, are either rated investment grade or are unrated and determined to be of comparable quality by the fund's advisor. However, each fund may invest up to 5% of its total assets in securities that, at the time of purchase, are rated lower than investment grade or are unrated and of comparable quality (securities commonly referred to as "high-yield" securities or "junk bonds"). Each fund will not invest in securities rated lower than B- at the time of purchase or in unrated securities of equivalent quality. If the rating of a security is reduced or discontinued after purchase, the fund is not required to sell the security, but may consider doing so. Each fund's investments in high yield securities (rated and unrated) and investment-grade quality unrated securities will not exceed, in the aggregate, 25% of the fund's total assets (not including unrated securities that have been pre-refunded with U.S. Government securities and U.S. Government agency securities).
Each fund, other than Short Tax Free Fund, will attempt to maintain the weighted average maturity of its portfolio securities at three to ten years under normal market conditions. Short Tax Free Fund will attempt to maintain the average effective duration of its portfolio securities at 3 1/2 years or less under normal market conditions. The fund's effective duration is a measure of how the fund may react to interest rate changes. See "More About the Funds" for a discussion of effective duration.
PRINCIPAL RISKS
The price and yield of each fund will change daily due to changes in interest rates and other factors, which means you could lose money. The principal risks of investing in these funds include:
- Active Management Risk
- Call Risk
- Credit Risk
- Income Risk
- Interest Rate Risk
- Inverse Floating Rate Securities Risk
- Municipal Lease Obligations Risk
- Political and Economic Risks
In addition, California Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund, and Oregon Intermediate Tax Free Fund are subject to Non-Diversification Risk.
See "More About the Funds" for a discussion of these risks.
Fund Summaries
California Intermediate Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
5.82% (0.90)% 9.63% 4.47% 8.36% 3.74% 3.53% 2.35% 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.74% Worst Quarter: Quarter ended June 30, 2004 (1.96)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Five Years Inception --------------------------------------------------------------------------------------------------------------------- California Intermediate Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 8/8/97 0.05% 3.98% 4.42% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (0.02)% 3.91% 4.37% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 1.36% 3.96% 4.36% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 8/8/97 2.59% 4.61% 4.80% --------------------------------------------------------------------------------------------------------------------- Lehman 7-Year Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 1.72% 5.13% 5.27% --------------------------------------------------------------------------------------------------------------------- Lipper California Intermediate Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.56% 4.03% 4.47% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between six and eight years. The since inception performance of the index is calculated from 8/31/97.
(3)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of five to ten years that are exempt from taxation in California. The since inception performance of the average is calculated from 8/31/97.
Fund Summaries
Colorado Intermediate Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
3.86% 7.07% 5.44% (1.58)% 8.52% 5.59% 8.70% 4.09% 2.98% 1.91% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 3.85% Worst Quarter: Quarter ended June 30, 2004 (2.16)% |
AVERAGE ANNUAL TOTAL RETURNS Inception AS OF 12/31/05 Date One Year Five Years Ten Years --------------------------------------------------------------------------------------------------------------------- Colorado Intermediate Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 4/4/94 (0.37)% 4.16% 4.38% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (0.47)% 4.11% 4.33% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 1.24% 4.15% 4.36% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 4/4/94 2.06% 4.75% 4.66% --------------------------------------------------------------------------------------------------------------------- Lehman 7-Year Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 1.72% 5.13% 5.26% --------------------------------------------------------------------------------------------------------------------- Lipper Other States Intermediate Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.45% 4.03% 4.16% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between six and eight years.
(3)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of five to ten years that are exempt from taxation on a specified state basis.
Fund Summaries
Intermediate Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
3.72% 6.79% 5.38% (1.46)% 8.84% 4.83% 9.02% 4.28% 2.95% 2.20% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.30% Worst Quarter: Quarter ended June 30, 2004 (2.10)% |
AVERAGE ANNUAL TOTAL RETURNS Inception AS OF 12/31/05(1) Date One Year Five Years Ten Years --------------------------------------------------------------------------------------------------------------------- Intermediate Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 12/22/87 (0.15)% 4.15% 4.38% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (0.18)% 4.12% 4.31% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 1.34% 4.14% 4.33% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/4/94 2.35% 4.75% 4.68% --------------------------------------------------------------------------------------------------------------------- Lehman 7-Year Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 1.72% 5.13% 5.26% --------------------------------------------------------------------------------------------------------------------- Lipper Intermediate Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.62% 4.32% 4.57% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between six and eight years.
(3)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of five to ten years.
Fund Summaries
Minnesota Intermediate Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
3.82% 6.74% 5.34% (1.26)% 8.75% 4.74% 8.23% 3.99% 3.02% 2.14% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 3.79% Worst Quarter: Quarter ended June 30, 2004 (1.77)% |
AVERAGE ANNUAL TOTAL RETURNS Inception AS OF 12/31/05 Date One Year Five Years Ten Years --------------------------------------------------------------------------------------------------------------------- Minnesota Intermediate Tax Free Fund --------------------------------------------------------------------------------------------------------------------- Class A (return before taxes) 2/25/94 (0.18)% 3.93% 4.28% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (0.28)% 3.87% 4.22% --------------------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) 1.33% 3.93% 4.25% --------------------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 2/25/94 2.31% 4.53% 4.53% --------------------------------------------------------------------------------------------------------------------- Lehman 7-Year Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 1.72% 5.13% 5.26% --------------------------------------------------------------------------------------------------------------------- Lipper Other States Intermediate Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.45% 4.03% 4.16% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between six and eight years.
(3)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of five to ten years that are exempt from taxation on a specified state basis.
Fund Summaries
Oregon Intermediate Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class Y shares has varied from year to year. The performance of Class A shares will be lower due to their higher expenses.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns before taxes. For Class Y shares, the table includes returns both before and after taxes. After-tax returns for Class A shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS Y)(1,2)
(BAR CHART)
3.31% 7.06% 5.36% (1.50)% 8.76% 4.38% 8.61% 4.40% 2.89% 1.79% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Best Quarter: Quarter ended September 30, 2002 4.14% Worst Quarter: Quarter ended June 30, 2004 (1.96)% |
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/05(2) Date One Year Five Years Ten Years (Class A)
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Oregon Intermediate Tax Free Fund
Class A (return before taxes) 2/1/99 (0.64)% 4.39% N/A 3.64%
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Class Y (return before taxes) 10/31/86 1.79% 4.39% 4.46% N/A
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Class Y (return after taxes on distributions) 1.73% 4.33% 4.39% N/A
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Class Y (return after taxes on distributions and sale
of fund shares) 2.57% 4.34% 4.40% N/A
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Lehman 7-Year Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or taxes) 1.72% 5.13% 5.26% 4.75%
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Lipper Other States Intermediate Municipal Debt Funds
Category Average(4)
(reflects no reduction for sales charges or taxes) 1.45% 4.03% 4.16% 3.69%
|
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)Performance prior to 8/8/97 is that of Oregon Municipal Bond Trust Fund, a predecessor common trust fund. On 8/8/97, substantially all of the assets of Oregon Municipal Bond Trust Fund were transferred into Oregon Intermediate Tax Free Fund. The objectives, policies, and guidelines of the two funds were, in all material respects, identical. Oregon Municipal Bond Trust Fund's performance is adjusted to reflect Oregon Intermediate Tax Free Fund's Class Y share fees and expenses, before any fee waivers. Oregon Municipal Bond Trust Fund was not registered under the Investment Company Act of 1940 and therefore was not subject to certain investment restrictions that might have adversely affected performance.
(3)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between six and eight years. The since inception performance of the index is calculated from 1/31/99.
(4)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of five to ten years that are exempt from taxation on a specified state basis. The since inception performance of the average is calculated from 1/31/99.
Fund Summaries
Short Tax Free Fund
FUND PERFORMANCE
The following illustrations provide you with information on the fund's volatility and performance. Of course, the fund's past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future.
The bar chart shows you how performance of the fund's Class A shares has varied from year to year. The performance of Class Y shares will be higher due to their lower expenses. Sales charges are not reflected in the chart; if they were, returns would be lower.
The table compares the performance for each share class of the fund over different time periods, before and after taxes, to that of the fund's benchmark index, which is a broad measure of market performance, and to an index of funds with similar investment strategies. The performance information reflects sales charges and fund expenses; the benchmark is unmanaged, has no expenses, and is unavailable for investment. For Class A shares, the table includes returns both before and after taxes. For Class Y shares, the table only includes returns before taxes. After-tax returns for Class Y shares will vary. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
Both the chart and the table assume that all distributions have been reinvested. Performance reflects fee waivers in effect. If these fee waivers were not in place, performance would be reduced.
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
2.25% 1.00% 0.79% 2003 2004 2005 Best Quarter: Quarter ended September 30, 2004 1.55% Worst Quarter: Quarter ended June 30, 2004 (1.37)% |
AVERAGE ANNUAL TOTAL RETURNS Inception Since AS OF 12/31/05 Date One Year Inception -------------------------------------------------------------------------------------------------------- Short Tax Free Fund -------------------------------------------------------------------------------------------------------- Class A (return before taxes) 10/25/02 (1.49)% 1.26% -------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions) (1.49)% 1.22% -------------------------------------------------------------------------------------------------------- Class A (return after taxes on distributions and sale of fund shares) (0.07)% 1.45% -------------------------------------------------------------------------------------------------------- Class Y (return before taxes) 10/25/02 0.95% 2.13% -------------------------------------------------------------------------------------------------------- Lehman 3-Year Municipal Bond Index(2) (reflects no deduction for fees, expenses, or taxes) 0.86% 2.15% -------------------------------------------------------------------------------------------------------- Lipper Short Municipal Debt Funds Category Average(3) (reflects no deduction for sales charges or taxes) 1.42% 1.68% |
(1)Total return for the period from 1/1/06 through 9/30/06 was %.
(2)An unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between two and four years.
(3)Represents funds that invest primarily in municipal debt issues with dollar-weighted average maturities of less than three years. The since inception performance of the average is calculated from 10/31/02.
Fund Summaries
Fees and Expenses
The tables below describe the fees and expenses that you may pay if you buy and hold shares of the funds.
------------------------------------------------------------------------------------------ SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A(1) CLASS Y ------------------------------------------------------------------------------------------ MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (as a percentage of offering price) 2.25% None MAXIMUM DEFERRED SALES CHARGE (LOAD) (as a percentage of original purchase price or redemption proceeds, whichever is less) 0.00% None ANNUAL MAINTENANCE FEE only charged to accounts with balances below $500 $50 None ---------------------------------------------------------------------------------------------- |
(1)Investors may qualify for reduced sales charges. Investments of $1 million or more on which no front-end sales charge is paid may be subject to a contingent deferred sales charge.
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ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
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Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS A Fees Fees(1) Expenses Expenses(2)
-----------------------------------------------------------------------------------------------------------------------------
California Intermediate Tax Free Fund 0.50% 0.25% 0.47% 1.22%
Colorado Intermediate Tax Free Fund 0.50% 0.25% 0.52% 1.27%
Intermediate Tax Free Fund 0.50% 0.25% 0.30% 1.05%
Minnesota Intermediate Tax Free Fund 0.50% 0.25% 0.33% 1.08%
Oregon Intermediate Tax Free Fund 0.50% 0.25% 0.36% 1.11%
Short Tax Free Fund 0.50% 0.25% 0.33% 1.08%
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|
(1)The distributor is currently limiting its 12b-1 fees to 0.15%. This limitation may be terminated at any time.
(2)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.85% for California Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund, and Oregon Intermediate Tax Free Fund, and 0.75% for Short Tax Free Fund.
-----------------------------------------------------------------------------------------------------------------------------
Distribution and/or Total Annual
Management Service (12b-1) Other Fund Operating
CLASS Y Fees Fees Expenses Expenses(1)
-----------------------------------------------------------------------------------------------------------------------------
California Intermediate Tax Free Fund 0.50% None 0.47% 0.97%
Colorado Intermediate Tax Free Fund 0.50% None 0.52% 1.02%
Intermediate Tax Free Fund 0.50% None 0.30% 0.80%
Minnesota Intermediate Tax Free Fund 0.50% None 0.33% 0.83%
Oregon Intermediate Tax Free Fund 0.50% None 0.36% 0.86%
Short Tax Free Fund 0.50% None 0.33% 0.83%
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|
(1)Total Annual Operating Expenses are based on the funds' most recently completed fiscal year, absent any expense reimbursements or fee waivers. The advisor intends to voluntarily waive fees and reimburse other fund expenses through at least June 30, 2007 so that total operating expenses, after waivers, do not exceed 0.70% for California Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund, and Oregon Intermediate Tax Free Fund, and 0.60% for Short Tax Free Fund.
PROSPECTUS - First American Short & Intermediate Tax Free
Income Funds
Fund Summaries
Fees and Expenses CONTINUED
EXAMPLE This example is intended to help you compare the cost of investing in a fund with the cost of investing in other mutual funds. It assumes that you invest $10,000 for the time periods indicated, that your investment has a 5% return each year, and that the funds' operating expenses remain the same. Although your actual costs and returns may differ, based on these assumptions your costs would be:
CLASS A One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- California Intermediate Tax Free Fund $347 $603 $880 $1,669 --------------------------------------------------------------------------------------------------------------------------- Colorado Intermediate Tax Free Fund $351 $619 $906 $1,724 --------------------------------------------------------------------------------------------------------------------------- Intermediate Tax Free Fund $330 $552 $791 $1,479 --------------------------------------------------------------------------------------------------------------------------- Minnesota Intermediate Tax Free Fund $333 $561 $807 $1,513 --------------------------------------------------------------------------------------------------------------------------- Oregon Intermediate Tax Free Fund $336 $570 $823 $1,546 --------------------------------------------------------------------------------------------------------------------------- Short Tax Free Fund $333 $561 $807 $1,513 |
CLASS Y One Year Three Years Five Years Ten Years --------------------------------------------------------------------------------------------------------------------------- California Intermediate Tax Free Fund $99 $309 $536 $1,190 --------------------------------------------------------------------------------------------------------------------------- Colorado Intermediate Tax Free Fund $104 $325 $563 $1,248 --------------------------------------------------------------------------------------------------------------------------- Intermediate Tax Free Fund $82 $255 $444 $990 --------------------------------------------------------------------------------------------------------------------------- Minnesota Intermediate Tax Free Fund $85 $265 $460 $1,025 --------------------------------------------------------------------------------------------------------------------------- Oregon Intermediate Tax Free Fund $88 $274 $477 $1,061 --------------------------------------------------------------------------------------------------------------------------- Short Tax Free Fund $85 $265 $460 $1,025 |
More About the Funds
Investment Strategies, Risks and Other Investment Matters
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may be changed without shareholder approval. If a fund's objective changes, you will be notified at least 60 days in advance. Please remember, there is no guarantee that any fund will achieve its objective.
INVESTMENT STRATEGIES
The funds' principal investment strategies are discussed in the "Fund Summaries" section. These are the strategies that the funds' investment advisor believes are most likely to be important in trying to achieve the funds' objectives. This section provides more information about some of the funds' principal and non-principal investment strategies. You should be aware that each fund may also use strategies and invest in securities that are not described in this prospectus, but that are described in the Statement of Additional Information (SAI). For a copy of the SAI, call Investor Services at 800 677-FUND.
Investment Approach. In selecting securities for the funds, fund managers first determine their economic outlook and the direction in which inflation and interest rates are expected to move. In selecting individual securities consistent with this outlook, the fund managers evaluate factors such as credit quality, yield, maturity, liquidity, and portfolio diversification. In the case of Intermediate Tax Free Fund and Short Tax Free Fund, geographical diversification is also a factor. Fund managers conduct research on potential and current holdings in the funds to determine whether a fund should purchase or retain a security. This is a continuing process the focus of which changes according to market conditions, the availability of various permitted investments, and cash flows into and out of the funds.
Municipal Securities. Municipal securities are issued to finance public infrastructure projects such as streets and highways, schools, water and sewer systems, hospitals, and airports. They also may be issued to refinance outstanding obligations as well as to obtain funds for general operating expenses and for loans to other public institutions and facilities.
The funds may invest in municipal securities such as "general obligation" bonds, "revenue" bonds, and participation interests in municipal leases. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Revenue bonds are payable only from the revenues generated by a specific project or from another specific revenue source. Participation interests in municipal leases are undivided interests in a lease, installment purchase contract, or conditional sale contract entered into by a state or local government unit to acquire equipment or facilities.
The municipal securities in which the funds invest may include refunded bonds and zero coupon bonds. Refunded bonds may have originally been issued as general obligation or revenue bonds, but become "refunded" when they are secured by an escrow fund, usually consisting entirely of direct U.S. government obligations and/or U.S. government agency obligations. Zero coupon bonds are issued at substantial discounts from their value at maturity and pay no cash income to their holders until they mature. When held to maturity, their entire return comes from the difference between their purchase price and their maturity value.
Effective Duration. Short Tax Free Fund attempts to maintain the average effective duration of its portfolio securities at 3 1/2 years or less under normal market conditions. Effective duration, one measure of interest rate risk, measures how much the value of a security is expected to change with a given change in interest rates. The longer a security's effective duration, the more sensitive its price to changes in interest rates. For example, if interest rates were to increase by one percentage point, the market value of a bond with an effective duration of three years would decrease by 3%, with all other factors being constant. However, all other factors are rarely constant. Effective duration is based on assumptions and subject to a number of limitations. It is most useful when interest rate changes are small, rapid, and occur equally in short-term and long-term securities.
Ratings. The funds have investment strategies requiring them to invest in municipal securities that have received a particular rating from a rating service such as Moody's or Standard & Poor's. Any reference in this prospectus to a specific rating encompasses all gradations of that rating. For example, if the prospectus says that a fund may invest in securities rated as low as B, the fund may invest in securities rated B-.
Temporary Investments. In an attempt to respond to adverse market, economic, political, or other conditions, each fund may temporarily invest without limit in cash and in U.S. dollar-denominated high-quality money market instruments and other short-term securities, including securities which pay income that is subject to federal and state income tax. These investments may include money market funds advised by the funds' advisor. Because these investments may be taxable, and may result in a lower yield than would be available from investments with a lower quality or longer term, they may prevent a fund from achieving its investment objective.
Portfolio Turnover. Fund managers may trade securities frequently, resulting, from time to time, in an annual portfolio turnover rate of over 100%. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of commissions or mark-ups to broker-dealers that the fund pays when it buys and sells securities. The "Financial Highlights" section of this prospectus shows each fund's historical portfolio turnover rate.
More About the Funds
Investment Strategies, Risks and Other Investment Matters CONTINUED
PRINCIPAL RISKS
The principal risks of investing in each fund are identified in the "Fund Summaries" section. These risks are described below.
Active Management Risk. Each fund is actively managed and its performance therefore will reflect in part the advisor's ability to make investment decisions which are suited to achieving the fund's investment objective. Due to its active management, a fund could underperform other mutual funds with similar investment objectives.
Call Risk. Many municipal bonds may be redeemed at the option of the issuer, or "called," before their stated maturity date. In general, an issuer will call its bonds if they can be refinanced by issuing new bonds which bear a lower interest rate. The funds are subject to the possibility that during periods of falling interest rates, a municipal bond issuer will call its high-yielding bonds. A fund would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the fund's income.
Credit Risk. Each fund is subject to the risk that the issuers of debt securities held by the fund will not make payments on the securities. There is also the risk that an issuer could suffer adverse changes in financial condition that could lower the credit quality of a security. This could lead to greater volatility in the price of the security and in shares of the fund. Also, a change in the credit quality rating of a bond could affect the bond's liquidity and make it more difficult for the fund to sell. In adverse economic or other circumstances, issuers of lower rated securities are more likely to have difficulty making principal and interest payments than issuers of higher rated securities. When a fund purchases unrated securities, it will depend on the advisor's analysis of credit risk without the assessment of an independent rating organization, such as Moody's or Standard & Poor's.
Income Risk. Each fund's income could decline due to falling market interest rates. This is because, in a falling interest rate environment, the funds generally will have to invest the proceeds from sales of fund shares, as well as the proceeds from maturing portfolio securities (or portfolio securities that have been called, see "Call Risk" above), in lower-yielding securities.
Interest Rate Risk. Debt securities in the funds will fluctuate in value with changes in interest rates. In general, debt securities will increase in value when interest rates fall and decrease in value when interest rates rise. Longer-term debt securities are generally more sensitive to interest rate changes. Each fund may invest in zero coupon securities, which do not pay interest on a current basis and which may be highly volatile as interest rates rise or fall. The funds' investments in inverse floating rate municipal securities also may be highly volatile with changing interest rates. See "Inverse Floating Rate Securities Risk" below.
Inverse Floating Rate Securities Risk. Each fund may invest up to 10% of its total assets in inverse floating rate municipal securities. These securities pay interest at a rate that varies inversely to changes in the interest rate of specified municipal securities or a specified index. The interest rate on this type of security will generally change at a multiple of any change in the reference interest rate. As a result, the values of these securities may be highly volatile as interest rates rise or fall.
Municipal Lease Obligations Risk. Each fund may purchase participation interests in municipal leases. These are undivided interests in a lease, installment purchase contract, or conditional sale contract entered into by a state or local government unit to acquire equipment or facilities. Participation interests in municipal leases pose special risks because many leases and contracts contain "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body. Although these kinds of obligations are secured by the leased equipment or facilities, it might be difficult and time consuming to dispose of the equipment or facilities in the event of non-appropriation, and the fund might not recover the full principal amount of the obligation.
Non-Diversification Risk. Each fund other than Intermediate Tax Free Fund and Short Tax Free Fund is non-diversified fund. A non-diversified fund may invest a larger portion of its assets in a fewer number of issuers than a diversified fund. Because a relatively high percentage of the fund's assets may be invested in the securities of a limited number of issuers, the fund's portfolio may be more susceptible to any single economic, political or regulatory occurrence than the portfolio of a diversified fund.
Political and Economic Risks. The values of municipal securities may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. Other factors that could affect municipal securities include a change in the local, state, or national economy, demographic factors, ecological or environmental concerns, statutory limitations on the issuer's ability to increase taxes, and other developments generally affecting the revenue of issuers (for example, legislation or court decisions reducing state aid to local governments or mandating additional services). To the extent a fund invests in the securities of issuers located in a single state, it will be disproportionately affected by political and economic conditions and developments in that state. The value of municipal securities also may be adversely affected by future changes in federal or state income tax laws, including rate reductions, the imposition of a flat tax, or the loss of a current state income tax exemption.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the funds' policies and procedures with respect to the disclosure of each fund's portfolio securities is available in the funds' SAI.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares
GENERAL
You may purchase, redeem, or exchange shares of the funds on any day when the New York Stock Exchange (NYSE) is open, except that shares cannot be purchased by wire transfer on days that federally chartered banks are closed. Purchases, redemptions and exchanges may be restricted in the event of an early or unscheduled close of the NYSE.
The funds have authorized certain investment professionals and financial institutions ("financial intermediaries") to accept purchase, redemption, or exchange orders on their behalf. Your purchase or redemption price will be based on that day's net asset value (NAV) per share if your order is received by the funds or an authorized financial intermediary in proper form prior to the time the funds calculate their NAV. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Calculating Net Asset Value" below. Contact your financial intermediary to determine the time by which it must receive your order to be assured same day processing. To make sure your order is in proper form, you must follow the instructions set forth below under "Purchase, Redemption and Exchange Procedures."
Some financial intermediaries may charge a fee for helping you purchase, redeem or exchange shares. Contact your financial intermediary for more information. No such fee will be imposed if you purchase shares directly from the funds.
The funds may be offered only to persons in the United States. This prospectus should not be considered a solicitation or offering of fund shares outside the United States.
CHOOSING A SHARE CLASS
The funds issue their shares in two classes -- Class A and Class Y shares -- with each class having a different cost structure. As noted below, only certain eligible investors can purchase Class Y shares of the funds, whereas Class A shares are generally available to investors. You should decide which share class best suits your needs.
Eligibility to Invest in Class Y Shares
Class Y shares are offered to clients of financial intermediaries who have been authorized to offer Class Y shares and who charge such clients an ongoing fee for advisory, investment, consulting or similar services. Such clients may include, but are not limited to, individuals, corporations, endowments and pension plans (including tax-deferred retirement plans and profit sharing plans).
Class Share Overview
ANNUAL 12B-1 FEES
(AS A % OF NET ASSETS)
--------------------------------
FRONT-END CONTINGENT SHAREHOLDER
SALES CHARGE DEFERRED SALES DISTRIBUTION SERVICING
(FESC) CHARGE (CDSC) FEE FEE
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Class A 2.25%(1) 0.00%(2) No 0.25%
Class Y No No No No
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(1)The FESC is reduced for larger purchases. See "Determining Your Share Price -- Class A Shares" below.
(2)Class A share investments of $1 million or more on which no FESC is paid may be subject to a 1% CDSC.
Class Y shares are generally a better choice than Class A shares if you are eligible to purchase this share class.
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Purchasing, Redeeming, and Exchanging Shares CONTINUED
DETERMINING YOUR SHARE PRICE
Class A Shares
Your purchase price for Class A shares is typically the net asset value of your shares, plus a front-end sales charge. Sales charges vary depending on the amount of your purchase. The sales charge you pay may differ slightly from the amount set forth below because of rounding that occurs in the calculation used to determine your sales charge.
Sales Charge
-------------------------------
As a % As a %
of of Net
Offering Asset
Purchase Amount Price Value
---------------------------------------------------------------------------------------------
Less than $50,000 2.25% 2.30%
$50,000 - $99,999 2.00% 2.04%
$100,000 - $249,999 1.75% 1.78%
$250,000 - $499,999 1.25% 1.27%
$500,000 - $999,999 1.00% 1.01%
$1 million and over 0.00% 0.00%
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Reducing Your Sales Charge on Class A Shares. As shown in the preceding table, larger purchases of Class A shares reduce the percentage sales charge you pay. In determining whether you are entitled to pay a reduced sales charge, you may aggregate certain other purchases with your current purchase, as follows.
Prior Purchases. Prior purchases of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) will be factored into your sales charge calculation. You will receive credit for the current net asset value of the other Class A, Class B, and Class C shares you hold at the time of your purchase, including shares held in individual retirement, custodial or personal trust accounts. For example, let's say you're making a $10,000 investment and you already own other First American Fund Class A shares that are currently valued at $45,000. You will receive credit for the current value of these shares and your sales charge will be based on a total purchase amount of $55,000. If the current net asset value of your shares is less than their original purchase price, you may receive credit for their original purchase price instead, but only if you provide a written request to the funds and provide them with the records necessary to demonstrate the shares' purchase price.
Purchases by Related Accounts. Concurrent and prior purchases by certain other accounts of Class A, Class B, and Class C shares of any First American Fund (except a money market fund) also will be combined with your purchase to determine your sales charge. The fund will combine purchases made by you, your spouse or domestic partner, and your dependent children when it calculates the sales charge, including purchases in individual retirement, custodial and personal trust accounts.
Letter of Intent. If you plan to invest $50,000 or more over a 13-month period in Class A, Class B, or Class C shares of any First American Fund except the money market funds, you may reduce your sales charge for Class A purchases by signing a non-binding letter of intent. If you do not fulfill the letter of intent, you must pay the applicable sales charge. In addition, if you reduce your sales charge to zero under a letter of intent and then sell your Class A shares within 18 months of their purchase, you may be charged a contingent deferred sales charge of 1%. See "Class A Share Investments of Over $1 Million" below.
It is your responsibility to determine whether you are entitled to pay a reduced sales charge. The fund is not responsible for making this determination. To receive a reduced sales charge, you must notify the fund at the time of the purchase order that a quantity discount may apply to your current purchase. If you purchase shares by mail, you must notify the fund in writing. Otherwise, simply inform your financial intermediary or Investor Services if you are purchasing shares directly from the funds, and they will notify the fund.
You should provide your financial intermediary with information or records regarding any other accounts in which there are holdings eligible to be aggregated, including:
- all of your accounts at your financial intermediary.
- all of your accounts at any other financial intermediary.
- all accounts of any related party (such as a spouse or dependent child) held with any financial intermediary.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
You should keep the records necessary to demonstrate the purchase price of shares held in these accounts since neither the fund and its transfer agent nor your financial intermediary may have this information.
More information on these ways to reduce your sales charge appears in the SAI.
Purchasing Class A Shares Without a Sales Charge. The following persons may purchase a fund's Class A shares at net asset value without a sales charge:
- directors, advisory board members, full-time employees and retirees of the advisor and its affiliates.
- current and retired officers and directors of the funds.
- full-time employees of any broker-dealer authorized to sell fund shares.
- full-time employees of the fund's counsel.
- members of the immediate families of any of the foregoing (i.e., a spouse or domestic partner and any dependent children).
- persons who purchase the funds through "one-stop" mutual fund networks through which the funds are made available.
- persons participating in a fee-based program sponsored and maintained by a registered broker-dealer.
- trust companies and bank trust departments acting in a fiduciary, advisory, agency, custodial or similar capacity.
- group retirement plans sponsored or administered by affiliates of the advisor.
- group retirement plans with at least $2.5 million in plan assets. (This minimum may be waived at the discretion of the distributor for purchases by group retirement plans made through financial institutions such as banks or record keepers.)
Reinvesting After a Redemption. If you redeem Class A shares of a First American Fund (except money market fund shares on which you have not paid a sales charge), you may reinvest in Class A shares of that fund or another First American fund within 180 days without a sales charge. To reinvest in Class A shares at net asset value (without paying a sales charge), you must notify the Fund directly in writing or notify your financial intermediary.
Class A Share Investments of Over $1 Million. There is no initial sales charge on Class A share purchases of $1 million or more (including purchases that reach the $1 million level as a result of aggregating prior purchases and purchases by related accounts). However, your financial intermediary may receive a commission of up to 1% on your purchase. If such a commission is paid, you will be assessed a contingent deferred sales charge (CDSC) of 1% if you sell your shares within 18 months. The CDSC you pay may differ slightly from this amount because of rounding that occurs in the calculation used to determine your CDSC. To find out whether you will be assessed a CDSC, ask your financial intermediary.
The CDSC is based on the value of your shares at the time of purchase in the case of a partial redemption. If you redeem all of your shares, the CDSC is based on the value of your shares at the time of purchase or at the time of redemption, whichever is less. The charge does not apply to shares you acquired by reinvesting your dividend or capital gain distributions. To help lower your costs, Class A shares that are not subject to a CDSC will be redeemed first. The CDSC will be waived in the circumstances described below under "Waiving Contingent Deferred Sales Charges."
CDSCs on Class A share redemptions will be waived for:
- redemptions following the death or disability (as defined in the Internal Revenue Code) of a shareholder.
- redemptions that equal the minimum required distribution from an IRA or other retirement plan to a shareholder who has reached the age of 70 1/2.
- redemptions through a systematic withdrawal plan, at a rate of up to 12% a year of your account's value. The systematic withdrawal limit will be based on the market value of your account at the time of each withdrawal.
- redemptions required as a result of over-contribution to an IRA plan.
Additional Information on Reducing Sales Charges. A link to information regarding the funds' Class A sales charge breakpoints is available on the funds' web site at www.firstamericanfunds.com.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Class Y Shares
Your purchase price for Class Y shares is their net asset value. This share class does not have a front-end sales charge or a CDSC.
12B-1 FEES
Each fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act that allows each fund to pay the fund's distributor an annual fee for the distribution and sale of its shares and/or for services provided to shareholders. Class A shares of the funds pay shareholder servicing fees equal, on an annual basis, to 0.25% of average daily net assets. The funds do not pay 12b-1 fees on Class Y shares.
The funds' distributor uses the 12b-1 shareholder servicing fee to compensate financial intermediaries for sales and/or administrative services performed on behalf of fund shareholders. Because these fees are paid out of a fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
COMPENSATION PAID TO FINANCIAL INTERMEDIARIES
The funds' distributor receives any front-end sales charge or CDSC that you pay and any 12b-1 fees paid by the funds. From this revenue, the distributor will pay financial intermediaries for the services they provide. The funds' advisor and/or distributor may make additional payments to intermediaries from their own assets, as described below under "Additional Payments to Financial Intermediaries."
Sales Charge Reallowance
The distributor pays (or "reallows") a portion of the front-end sales charge on Class A shares to your financial intermediary, as follows.
Maximum Reallowance
as a % of
Purchase Amount Purchase Price
--------------------------------------------------------------------------------------
Less than $50,000 2.00%
$50,000 - $99,999 1.75%
$100,000 - $249,999 1.50%
$250,000 - $499,999 1.00%
$500,000 - $999,999 0.75%
$1 million and over 0.00%
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Sales Commissions
There is no initial sales charge on Class A share purchases of $1 million or more, however, your financial intermediary may receive a commission of up to 1% on your purchase.
12b-1 Fees
The funds' distributor uses the 12b-1 shareholder servicing fee to compensate financial intermediaries for administrative services performed on behalf of the intermediaries' customers. These intermediaries receive shareholder servicing fees of 0.25% of a fund's Class A share average daily net assets attributable to shares sold through them. For Class A shares, the distributor begins to pay shareholder servicing fees to these intermediaries immediately after you purchase shares. The intermediaries continue to receive these fees for as long as you hold fund shares.
Additional Payments to Financial Intermediaries
The advisor and/or the distributor may pay additional compensation to financial intermediaries out of their own resources in connection with the sale or retention of fund shares and/or in exchange for sales and/or administrative services performed on behalf of the intermediaries' customers. The amount of these payments may be significant, and may create an incentive for an intermediary or its
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
employees or associated persons to recommend or sell shares of the funds to you. These payments are not reflected in the fees and expenses listed in the "Fund Summaries" section of the prospectus because they are not paid by the funds.
These payments are negotiated and may be based on such factors as the number or value of shares that the financial intermediary sells or may sell; the value of the assets invested in the funds by the intermediary's customers; reimbursement of ticket or operational charges (fees that an intermediary charges its representatives for effecting transactions in fund shares); lump sum payment for services provided; the type and nature of services or support furnished by the intermediary; and/or other measures as determined from time to time by the advisor and/or distributor.
The advisor and/or distributor may make other payments or allow other promotional incentives to financial intermediaries to the extent permitted by SEC and NASD rules and by other applicable laws and regulations. Certain intermediaries also receive payments in recognition of sub-accounting, recordkeeping or other services they provide to shareholders or plan participants who invest in the fund or other First American Funds through their retirement plan.
You can ask your financial intermediary for information about any payments it receives from the advisor and/or the distributor and from the funds, and any services your intermediary provides, as well as about fees and/or commissions your intermediary charges. You can also find more details about payments made by the advisor, and/or the distributor in the funds' SAI.
PURCHASE, REDEMPTION, AND EXCHANGE PROCEDURES
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
As a result, when you open an account, we will ask for your name, permanent street address, date of birth, and social security or taxpayer identification number. Addresses containing a P.O. Box will not be accepted. We may also ask for other identifying documents or information.
Purchasing Class A Shares
You can become a shareholder in any of the funds by making the following minimum initial or additional investments.
MINIMUM MINIMUM
INITIAL ADDITIONAL
ACCOUNT TYPES INVESTMENT INVESTMENT
-------------------------------------------------------------------------------------
Retirement plan, Uniform Gift to Minors Act (UGMA)/
Uniform Transfers to Minors Act (UTMA) accounts $ 500 $ 25
All other accounts $1,000 $100
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The funds have the right to waive these minimum investment requirements for shares offered through certain institutions and for employees of the funds' advisor and its affiliates. The funds also have the right to reject any purchase order.
By Phone. You can purchase shares by calling your financial intermediary, if they have a sales agreement with the funds' distributor. You can also place purchase orders of $100 or more by calling Investor Services at 800 677-FUND. Funds will be transferred electronically from your bank account through the Automated Clearing House (ACH) network. Before making a purchase by electronic funds transfer, you must submit a new account form to the funds and elect this option. Be sure to include all of your banking information on the form.
By Wire. You can purchase shares by making a wire transfer from your bank. Before making an initial investment by wire, you must submit a new account form to the funds. After receiving your form, a service representative will contact you with your account number and wiring instructions. Your order will be priced at the next NAV calculated after the funds' custodian receives your payment by wire. Before making any additional purchases by wire, you should call Investor Services at 800 677-FUND. You cannot purchase shares by wire on days when federally chartered banks are closed.
PROSPECTUS - First American Short & Intermediate Tax Free
Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
By Mail. To purchase shares by mail, simply complete and sign a new account form, enclose a check made payable to the fund you wish to invest in, and mail both to:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
After you have established an account, you may continue to purchase shares by mailing your check to First American Funds at the same address.
Please note the following:
- All purchases must be drawn on a bank located within the United States and payable in U.S. dollars to First American Funds.
- Cash, money orders, cashier's checks for less than $10,000, third-party checks, Treasury checks, credit card checks, traveler's checks, starter checks, and credit cards will not be accepted.
- If a check does not clear your bank, the funds reserve the right to cancel the purchase, and you could be liable for any losses or fees incurred by the fund as a result of your check failing to clear.
By Systematic Investment Plan. To purchase shares as part of a savings discipline, you may add to your investment on a regular basis:
- by having $100 or more ($25 for a retirement plan or a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account) automatically withdrawn from your bank account on a periodic basis and invested in fund shares, or
- through automatic monthly exchanges of your First American fund into another First American Fund of the same class.
You may apply for participation in either of these programs through your financial intermediary or by calling Investor Services at 800 677-FUND.
Redeeming Class A Shares
When you redeem shares, the proceeds normally will be mailed or wired within three days, but in no event more than seven days, after your request is received in proper form.
By Phone. If you purchased shares through a financial intermediary, simply call them to redeem your shares.
If you did not purchase shares through a financial intermediary, you may redeem your shares by calling Investor Services at 800 677-FUND. Proceeds can be wired to your bank account (if the proceeds are at least $1,000 and you have previously supplied your bank account information to the fund) or sent to you by check. Proceeds also can be sent directly to your bank or brokerage account via electronic funds transfer if your bank or brokerage firm is a member of the ACH network. The First American Funds reserve the right to limit telephone redemptions to $50,000 per day.
If you recently purchased your shares by check or through the ACH network, proceeds from the sale of those shares may not be available until your check or ACH payment has cleared, which may take up to 15 calendar days from the date of purchase.
By Mail. To redeem shares by mail, send a written request to your financial intermediary, or to the fund at the following address:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL: --------------------------------- --------------------------------- First American Funds First American Funds P.O. Box 3011 615 East Michigan Street Milwaukee, WI 53201-3011 Milwaukee, WI 53202 |
Your request should include the following information:
- name of the fund
- account number
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Purchasing, Redeeming, and Exchanging Shares CONTINUED
-dollar amount or number of shares redeemed
-name on the account
-signatures of all registered account owners
Signatures on a written request must be guaranteed if:
-you would like redemption proceeds to be paid to anyone other than to the shareholder of record.
-you would like the redemption check mailed to an address other than the address on the fund's records, or you have changed the address on the fund's records within the last 30 days.
-your redemption request is for $50,000 or more.
-bank information related to an automatic investment plan, telephone purchase or telephone redemption is changed.
A signature guarantee assures that a signature is genuine and protects shareholders from unauthorized account transfers. Banks, savings and loan associations, trust companies, credit unions, broker-dealers, and member firms of a national securities exchange may guarantee signatures. Call your financial intermediary to determine if it has this capability. A notary public is not an acceptable signature guarantor.
Proceeds from a written redemption request will be sent to you by check unless another form of payment is requested.
By Wire. You can call or write to have redemption proceeds sent to a bank account. See the policies for redeeming shares by phone or by mail. Before requesting to have redemption proceeds sent to a bank account, please make sure the funds have your bank account information on file. If the funds do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. If the bank and fund accounts do not have at least one common owner, you must provide written instructions signed by all fund and bank account owners, and each individual must have their signature guaranteed.
By Systematic Withdrawal Plan. If your account has a value of $5,000 or more, you may redeem a specific dollar amount from your account on a regular basis. To set up systematic withdrawals, contact your financial intermediary.
You should not make systematic withdrawals if you plan to continue investing in a fund, due to sales charges and tax liabilities.
Exchanging Class A Shares
If your investment goals or your financial needs change, you may move from one First American Fund to another First American Fund. There is no fee to exchange shares.
Generally, you may exchange your shares only for the same class of shares of the other fund, with certain exceptions, including:
-You may exchange your Class A shares for Class Y shares of the same or another First American Fund if you subsequently become eligible to purchase Class Y shares.
-If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
Exchanges are made based on the net asset value per share of each fund at the time of the exchange. When you exchange your Class A shares of one of the funds for Class A shares of another First American Fund, you do not have to pay a sales charge.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
By Phone. If both funds have identical shareholder registrations, you may exchange shares by calling your financial intermediary or by calling the funds directly at 800 677-FUND.
By Mail. To exchange shares by written request, please follow the procedures under "Redeeming Class A Shares" above. Be sure to include the names of both funds involved in the exchange.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
By Systematic Exchange Plan. You may add to your investment on a regular basis through automatic monthly exchanges of your First American fund into another First American Fund of the same class. You may apply for participation in this program through your financial intermediary or by calling Investor Services at 800 677-FUND.
Purchasing, Redeeming and Exchanging Class Y Shares
You may purchase or redeem shares by calling your financial intermediary. When purchasing shares, payment must be made by wire transfer, which can be arranged by your financial intermediary. You cannot purchase shares by wire on days when federally chartered banks are closed. The funds reserve the right to impose minimum investment amounts on clients of financial intermediaries that charge the funds or the advisor transaction or recordkeeping fees.
If the fund or an authorized financial intermediary receives your redemption request by 3:00 p.m. Central time, payment of your redemption proceeds will ordinarily be made by wire on the next business day. It is possible, however, that payment could be delayed by up to seven days.
Exchanging Class Y Shares. If your investment goals or your financial needs change, you may exchange your shares for Class Y shares of another First American Fund. Exchanges are made at the net asset value per share of each fund at the time of the exchange. There is no fee to exchange shares. If you are no longer eligible to hold Class Y shares, you may exchange your shares for Class A shares at net asset value. Class A shares have higher expenses than Class Y shares.
To exchange your shares, call your financial intermediary.
Before exchanging into any fund, be sure to read its prospectus carefully. A fund may change or cancel its exchange policies at any time. You will be notified of any changes. The funds have the right to limit exchanges that are deemed to constitute short-term trading. See "Additional Information on Purchasing, Redeeming and Exchanging Shares -- Short-Term Trading of Fund Shares" below.
ADDITIONAL INFORMATION ON PURCHASING, REDEEMING AND EXCHANGING SHARES
Calculating Net Asset Value
The funds generally calculate their NAV as of 3:00 p.m. Central time every day the New York Stock Exchange is open.
A fund's NAV is equal to the market value of its investments and other assets, less any liabilities, divided by the number of fund shares. Security valuations for the funds' investments are furnished by one or more independent pricing services that have been approved by the funds' board of directors. If market prices are not readily available for an investment or if the advisor believes they are unreliable, fair value prices may be determined in good faith using procedures approved by the funds' board of directors. Under these procedures, fair values are generally determined by a pricing committee appointed by the board of directors. The types of securities for which such fair value pricing might be required include, but are not limited to:
- Securities, including securities traded in foreign markets, where an event occurs after the close of the market in which such security principally trades, but before NAV is determined, that will affect the value of such security, or the closing value is otherwise deemed unreliable;
- Securities whose trading has been halted or suspended;
- Fixed-income securities that have gone into default and for which there is no current market value quotation; and
- Securities with limited liquidity, including certain high-yield securities or securities that are restricted as to transfer or resale.
Valuing securities at fair value involves greater reliance on judgment than valuing securities that have readily available market quotations. There can be no assurance that a fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the fund determines its NAV per share.
Short-Term Trading of Fund Shares
The funds discourage purchases and redemptions of their shares in response to short-term fluctuations in the securities markets. The funds' Board of Directors has adopted policies and procedures designed to detect and deter short-term trading in the funds' shares that may disadvantage long-term fund shareholders. These policies are described below. The funds will not knowingly accommodate trading in the funds' shares in violation of these policies. As discussed below, however, there is no guarantee that the funds will be able to
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
detect such trading in all accounts. See "Omnibus Accounts" below. These policies do not apply to purchases and sales of fund shares by other First American Funds.
Risks Associated with Short-Term Trading. Short-term trading in a fund's shares, particularly in larger amounts, may be detrimental to long-term shareholders of the fund. Depending on various factors, including the size of a fund, the amount of assets the fund typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades, and the types of securities in which the fund typically invests, short-term trading may interfere with the efficient management of the fund's portfolio, increase the fund's transaction costs, administrative costs and taxes, and/or impact the fund's performance.
In addition, the nature of a fund's portfolio holdings may allow a shareholder engaging in a short-term trading strategy to take advantage of possible delays between the change in the value of a fund's portfolio holdings and the reflection of that change in the net asset value of the fund's shares. Such a delay may occur in funds that have significant investments in foreign securities, where the value of those securities is established some time before the fund calculates its own share price, or in funds that hold significant investments in small-cap securities, high-yield (junk) bonds and other types of investments that may not be frequently traded. This type of short-term trading is sometimes referred to as "arbitrage market timing," and there is the possibility that such trading may dilute the value of fund shares if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices.
Short-Term Trading Policies. The funds' advisor monitors trading in fund shares in an effort to identify short-term trading activity that may disadvantage long-term shareholders. Only transactions that exceed a certain dollar threshold that has been determined to be potentially disruptive to the management of a fund are subject to monitoring. It is the policy of the funds to permit no more than one round trip by an investor during any 90-calendar-day period. A round trip is defined as a purchase into or redemption out of a fund (including purchases or redemptions accomplished by an exchange) paired with an opposite direction redemption out of or purchase into the same fund within 10 calendar days, in a dollar amount that exceeds the monitoring threshold. If the advisor determines that a shareholder has made more than one round trip during any 90-calendar-day period, the shareholder conducting such trading will, in less serious instances, be given an initial warning to discontinue such trading. In more serious instances (generally involving larger dollar amounts), or in the case of a second violation after an initial warning has been given, the shareholder may be temporarily or permanently barred from making future purchases into one or all of the funds or, alternatively, the funds may limit the amount, number or frequency of any future purchases and/or the method by which the shareholder may request future purchases (including purchases by an exchange or transfer between a fund and any other fund). In addition to the foregoing sanctions, the funds reserve the right to reject any purchase order at any time and for any reason, without prior written notice. The funds also reserve the right to revoke the exchange privileges of any person at any time and for any reason. In making determinations concerning the rejection of purchase orders and the revocation of exchange privileges, and in considering which sanctions to impose, the funds may consider an investor's trading history in any of the First American Funds, in non-First American mutual funds, or in accounts under a person's common ownership or control.
Certain transactions are not subject to the funds' short-term trading policies. These include transactions such as systematic redemptions and purchases; retirement plan contributions, loans and distributions (including hardship withdrawals); purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations; regular portfolio re-balancings in fee-based programs of registered investment advisors, financial planners and registered broker-dealers; and similar transactions.
Omnibus Accounts. Fund shares are frequently held through omnibus account arrangements, whereby a broker-dealer, investment advisor, retirement plan sponsor or other financial intermediary maintains an omnibus account with a fund for trading on behalf of its customers. The funds seek to apply their short-term trading policies and procedures to these omnibus account arrangements and will request that the intermediary provide individual account level detail (or participant level detail in the case of retirement plans) to the funds if more than one round trip in any 90 day period is detected at the omnibus or plan level and such round trips appear to be (a) attributable to an individual shareholder or plan participant and (b) potentially detrimental to the respective fund and its shareholders based on such factors as the time between transactions, the size of the transactions and the type of fund involved. If short-term trading is detected at the individual account or participant level, the funds will request that the financial intermediary take appropriate action to curtail the activity. If the financial intermediary does not take action, the funds will take such steps as are reasonably practicable to curtail the excessive trading, including terminating the relationship with the intermediary if necessary.
While the funds will request that financial intermediaries apply the funds' short-term trading policies to their customers who invest indirectly in the funds, the funds are limited in their ability to monitor the trading activity or enforce the funds' short-term trading policies with respect to customers of financial intermediaries. For example, the funds might not be able to detect any short-term trading facilitated by a financial intermediary, if this were to occur.
Policies and Services
Purchasing, Redeeming, and Exchanging Shares CONTINUED
Telephone Transactions
The funds and their agents will not be responsible for any losses that may result from acting on wire or telephone instructions that they reasonably believe to be genuine. The funds and their agents will each follow reasonable procedures to confirm that instructions received by telephone are genuine, which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual market activity. If you are unable to reach the funds or their agents by telephone, please consider sending written instructions.
Accounts with Low Balances
If your account balance falls below $500 as a result of redeeming or exchanging shares, the funds reserve the right to either:
-deduct a $50 annual account maintenance fee, or
-close your account and send you the proceeds, less any applicable contingent deferred sales charge.
Before taking any action, however, the funds will send you written notice of the action they intend to take and give you 30 days to re-establish a minimum account balance of $500.
Redemption in Kind
Generally, proceeds from redemption requests will be paid in cash. However, to minimize the effect of large redemption requests on a fund and its remaining shareholders, each fund reserves the right to pay part or all of the proceeds from a redemption request in a proportionate share of securities in the fund instead of cash. In selecting securities for a redemption in kind, the advisor will consider the best interests of the fund and the remaining fund shareholders, and will value these securities in accordance with the pricing methods employed to calculate the fund's net asset value per share. If you receive redemption proceeds in kind, you should expect to incur transaction costs upon disposition of the securities received in the redemption. In addition, you will bear the market risk associated with these securities until their disposition.
Policies and Services
Managing Your Investment
STAYING INFORMED
Shareholder Reports
Shareholder reports are mailed twice a year. They include financial statements and performance information, and, on an annual basis, a message from your portfolio managers and the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the funds will try to limit their mailings to one report for each address that lists one or more shareholders with the same last name. If you would like additional copies, please call Investor Services at 800 677-FUND.
Statements and Confirmations
Statements summarizing activity in your account are mailed quarterly. Confirmations are mailed following each purchase or sale of fund shares, but some, such as systematic purchases and dividend reinvestments are reported on your account statement. Generally, the funds do not send statements for shares held in a brokerage account or to individuals who have their shares held in an omnibus account, such as retirement plan participants. Please review your statements and confirmations as soon as you receive them and promptly report any discrepancies to your financial intermediary or to Investor Services at 800 677-FUND.
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared daily and paid monthly. Any capital gains are distributed at least once each year. If the fund receives your wire transfer payment for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on that day. If you place an exchange order for fund shares by the time the fund determines its NAV, you will begin to accrue dividends on the next business day. In the case of shares purchased by check, you will begin to accrue dividends on the first business day after the fund receives your check (provided your check is received by the time the fund determines its NAV).
Dividend and capital gain distributions will be reinvested in additional shares of the fund paying the distribution, unless you request that distributions be reinvested in another First American Fund or paid in cash. This request may be made on your new account form, by contacting your financial intermediary, or by calling Investor Services at 800 677-FUND. If you request that your distributions be paid in cash but those distributions cannot be delivered because of an incorrect mailing address, or if a distribution check remains uncashed for six months, the undelivered or uncashed distributions and all future distributions will be reinvested in fund shares at the current NAV.
TAXES
Some of the tax consequences of investing in the funds are discussed below. More information about taxes is in the SAI. However, because everyone's tax situation is unique, always consult your tax professional about federal, state, and local tax consequences.
Federal Taxes on Distributions
Each fund intends to meet certain federal tax requirements so that distributions of tax-exempt interest income may be treated as "exempt-interest dividends." These dividends are not subject to regular federal income tax. However, each fund may invest up to 20% of its net assets in municipal securities the interest on which is subject to the federal alternative minimum tax. Any portion of exempt-interest dividends attributable to interest on these securities may increase some shareholders' alternative minimum tax. The funds expect that their distributions will consist primarily of exempt-interest dividends. Intermediate Tax Free Fund's and Short Tax Free Fund's exempt-interest dividends generally will be subject to state or local income taxes.
Distributions paid from any interest income that is not tax-exempt and from any net realized capital gains will be taxable whether you reinvest those distributions or take them in cash. Distributions paid from taxable interest income will be taxed as ordinary income and not as "qualifying dividends" that are taxed at the same rate as long-term capital gains. Distributions of a fund's net long-term capital gains are taxable as long-term gains, regardless of how long you have held your shares.
Policies and Services
Managing Your Investment CONTINUED
Federal Taxes on Transactions
The sale of fund shares, or the exchange of one fund's shares for shares of another fund, will be a taxable event and may result in a capital gain or loss. The gain or loss will be considered long-term if you have held your shares for more than one year. A gain or loss on shares held for one year or less is considered short-term and is taxed at the same rates as ordinary income.
If in redemption of his or her shares a shareholder receives a distribution of securities instead of cash, the shareholder will be treated as receiving an amount equal to the fair market value of the securities at the time of the distribution for purposes of determining capital gain or loss on the redemption, and will also acquire a basis in the shares for federal income tax purposes equal to their fair market value.
The exchange of one class of shares for another class of shares in the same fund will not be taxable.
California Income Taxation
California Intermediate Tax Free Fund intends to comply with certain state tax requirements so that dividends it pays that are attributable to interest on California municipal securities will be excluded from the California taxable income of individuals, trusts, and estates. To meet these requirements, at least 50% of the value of the fund's total assets must consist of obligations which pay interest that is exempt from California personal income tax. Exempt-interest dividends are not excluded from the California taxable income of corporations and financial institutions. In addition, dividends derived from interest paid on California municipal bonds (including securities treated for federal purposes as private activity bonds) will not be subject to the alternative minimum tax that California imposes on individuals, trusts, and estates.
Colorado Income Taxation
Dividends paid by Colorado Intermediate Tax Free Fund will be exempt from
Colorado income taxes for individuals, trusts, estates, and corporations to the
extent that they are derived from interest on Colorado municipal securities. In
addition, dividends derived from interest on Colorado municipal securities
(including securities treated for federal purposes as private activity bonds)
will not be subject to the alternative minimum tax that Colorado imposes on
individuals, trusts, and estates.
Minnesota Income Taxation
Minnesota Intermediate Tax Free Fund intends to comply with certain state tax
requirements so that dividends it pays that are attributable to interest on
Minnesota municipal securities will be excluded from the Minnesota taxable net
income of individuals, estates, and trusts. To meet these requirements, at least
95% of the exempt-interest dividends paid by the fund must be derived from
interest income on Minnesota municipal securities. A portion of the fund's
dividends may be subject to the Minnesota alternative minimum tax.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions.
Oregon Income Taxation
Dividends paid by Oregon Intermediate Tax Free Fund will be exempt from Oregon income taxes for individuals, trusts and estates to the extent that they are derived from interest on Oregon municipal securities. Such dividends will not be excluded from the Oregon taxable income of corporations.
Additional Information
Management
FAF Advisors, Inc., formerly known as U.S. Bancorp Asset Management, Inc., is the funds' investment advisor. FAF Advisors provides investment management services to individuals and institutions, including corporations, foundations, pensions, and retirement plans. As of June 30, 2006, FAF Advisors and its affiliates had more than $102 billion in assets under management, including investment company assets of more than $65 billion. As investment advisor, FAF Advisors manages the funds' business and investment activities, subject to the authority of the funds' board of directors.
Each fund pays the investment advisor a monthly management fee for providing investment advisory services. The table below reflects management fees paid to the investment advisor, after taking into account any fee waivers, for the funds' most recently completed fiscal period.
Management fee
as a % of average
daily net assets
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CALIFORNIA INTERMEDIATE TAX FREE FUND %
COLORADO INTERMEDIATE TAX FREE FUND %
INTERMEDIATE TAX FREE FUND %
MINNESOTA INTERMEDIATE TAX FREE FUND %
OREGON INTERMEDIATE TAX FREE FUND %
SHORT TAX FREE FUND %
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A discussion regarding the basis for the board of directors' approval of the funds' investment advisory agreement appears in the funds' annual report to shareholders for the fiscal period ended June 30, 2006.
Direct Correspondence to:
First American Funds
P.O. Box 1330
Minneapolis, MN 55440-1330
Investment Advisor
FAF Advisors, Inc.
800 Nicollet Mall
Minneapolis, MN 55402
Distributor
Quasar Distributors, LLC
615 E. Michigan Street
Milwaukee, WI 53202
ADDITIONAL COMPENSATION
FAF Advisors, U.S. Bank National Association (U.S. Bank) and other affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and other trust and agency accounts that invest in the First American Funds. As described above, FAF Advisors receives compensation for acting as the funds' investment advisor. FAF Advisors, U.S. Bank and their affiliates also receive compensation in connection with the following:
Custody Services. U.S. Bank provides custody services to the funds. U.S. Bank is paid monthly fees equal, on an annual basis, to 0.005% of each fund's average daily net assets.
Administration Services. FAF Advisors and its affiliate, U.S. Bancorp Fund Services, LLC (Fund Services), act as the funds' administrator and sub-administrator, respectively, providing administration services that include general administrative and accounting services, blue sky services and shareholder services. For such services, each fund pays FAF Advisors the fund's pro rata portion of up to 0.15% of the aggregate average daily net assets of all open-end funds in the First American family of funds. FAF Advisors pays Fund Services a portion of its fee, as agreed to from time to time. In addition, it receives from the fund 0.10% of the relevant fund's average daily net assets for providing certain shareholder services and to reimburse it for making payments to certain financial institutions that maintain and provide services to omnibus accounts.
Transfer Agency Services. Fund Services provides transfer agency and dividend disbursing services, as well as certain shareholder services, to the funds. Fund Services receives fees for transfer agency and dividend disbursing services based upon the number of share classes and shareholder accounts maintained.
Distribution Services. Quasar Distributors, LLC (Quasar), an affiliate of FAF Advisors, receives distribution and shareholder servicing fees for acting as the funds' distributor.
Other Compensation. To the extent that fund shares are held through U.S. Bank or its broker-dealer affiliate, U.S. Bancorp Investments, Inc., those entities may receive distribution and/or shareholder servicing fees from the funds' distributor as well as other payments from the funds' distributor and/or advisor as described above under "Additional Payments to Institutions."
Additional Information
Management CONTINUED
PORTFOLIO MANAGEMENT
The portfolio managers primarily responsible for the funds' management are set forth below, followed by the portfolio managers' biographies.
California Intermediate Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund and Michael S. Hamilton has co-managed the fund since August 1997.
Colorado Intermediate Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund since April 1994 and Catherine M. Stienstra has co-managed the fund since November 2000.
Intermediate Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund since February 1994 and Catherine M. Stienstra has co-managed the fund since October 2002.
Minnesota Intermediate Tax Free Fund. Christopher L. Drahn has served as the primary portfolio manager for the fund since February 1994 and Douglas J. White has co-managed the fund since July 1998.
Oregon Intermediate Tax Free Fund. Michael S. Hamilton has served as the primary portfolio manager for the fund since May 1997 and Christopher L. Drahn has co-managed the fund since July 1998.
Short Tax Free Fund. Catherine M. Stienstra has served as the primary portfolio manager for the fund since October 2002 and Christopher L. Drahn has co-managed the fund since October 2002.
PORTFOLIO MANAGER BIOGRAPHIES
Christopher L. Drahn, CFA, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1980. He has 26 years of financial industry experience.
Michael S. Hamilton, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1989. He has 16 years of financial industry experience, including 14 years in portfolio management.
Catherine M. Stienstra, Senior Fixed-Income Portfolio Manager, joined U.S. Bancorp Asset Management in 1990. She has 18 years of financial industry experience, including 13 years in portfolio management.
Douglas J. White, CFA, Head of Tax Exempt Fixed Income, joined U.S. Bancorp Asset Management in 1987. He has 23 years of financial industry experience, including 21 years in portfolio management.
The SAI provides additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of securities in the funds.
Additional Information
Financial Highlights
The tables that follow present performance information about the Class A and Class Y shares of each fund. This information is intended to help you understand each fund's financial performance for the past five years or, if shorter, the period of the fund's operations. Some of this information reflects financial results for a single fund share held throughout the period. Total returns in the tables represent the rate that you would have earned or lost on an investment in the fund, excluding sales charges and assuming you reinvested all of your dividends and distributions.
This information has been derived from the financial statements audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the funds' financial statements, is included in the funds' annual report, which is available upon request.
CALIFORNIA INTERMEDIATE TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $10.35 $10.55 $10.64 $10.80 $10.41 $10.02
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.28 0.39 0.40 0.41 0.42 0.44
Realized and Unrealized Gains (Losses) on
Investments (0.20) (0.13) (0.05) (0.14) 0.39 0.39
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.08 0.26 0.35 0.27 0.81 0.83
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.29) (0.39) (0.41) (0.41) (0.42) (0.44)
Distributions (from net realized gains) (0.03) (0.07) (0.03) (0.02) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.32) (0.46) (0.44) (0.43) (0.42) (0.44)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.11 $10.35 $10.55 $10.64 $10.80 $10.41
====== ====== ====== ====== ====== ======
Total Return(2) 0.78% 2.51% 3.36% 2.58% 8.01% 8.41%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $3,441 $3,946 $3,381 $4,262 $4,870 $3,392
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.70%
Ratio of Net Investment Income to Average Net
Assets 3.73% 3.71% 3.78% 3.86% 4.01% 4.25%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.22% 1.10% 1.06% 1.06% 1.14% 1.21%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.36% 3.46% 3.57% 3.65% 3.72% 3.74%
Portfolio Turnover Rate 21% 29% 20% 17% 23% 12%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.37 $ 10.57 $ 10.66 $ 10.81 $ 10.43 $ 10.04
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.30 0.40 0.41 0.43 0.43 0.44
Realized and Unrealized Gains (Losses) on Investments (0.21) (0.13) (0.05) (0.14) 0.38 0.39
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.09 0.27 0.36 0.29 0.81 0.83
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.30) (0.40) (0.42) (0.42) (0.43) (0.44)
Distributions (from net realized gains) (0.03) (0.07) (0.03) (0.02) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.33) (0.47) (0.45) (0.44) (0.43) (0.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.13 $ 10.37 $ 10.57 $ 10.66 $ 10.81 $ 10.43
======= ======= ======= ======= ======= =======
Total Return(2) 0.88% 2.66% 3.51% 2.83% 8.05% 8.39%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $51,726 $49,292 $46,953 $44,600 $45,212 $43,647
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average Net Assets 3.89% 3.86% 3.93% 4.02% 4.16% 4.26%
Ratio of Expenses to Average Net Assets (excluding
waivers) 0.97% 0.85% 0.81% 0.81% 0.89% 0.96%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 3.62% 3.71% 3.82% 3.91% 3.97% 4.00%
Portfolio Turnover Rate 21% 29% 20% 17% 23% 12%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
COLORADO INTERMEDIATE TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $10.74 $ 10.98 $ 11.08 $ 11.12 $ 10.79 $10.28
------ ------- ------- ------- ------- ------
Investment Operations:
Net Investment Income 0.32 0.42 0.45 0.41 0.47 0.46
Realized and Unrealized Gains (Losses) on
Investments (0.28) (0.19) (0.11) (0.02) 0.32 0.52
------ ------- ------- ------- ------- ------
Total From Investment Operations 0.04 0.23 0.34 0.39 0.79 0.98
------ ------- ------- ------- ------- ------
Less Distributions:
Dividends (from net investment income) (0.32) (0.43) (0.44) (0.43) (0.46) (0.47)
Distributions (from net realized gains) (0.06) (0.04) -- -- -- --
------ ------- ------- ------- ------- ------
Total Distributions (0.38) (0.47) (0.44) (0.43) (0.46) (0.47)
------ ------- ------- ------- ------- ------
Net Asset Value, End of Period $10.40 $ 10.74 $ 10.98 $ 11.08 $ 11.12 $10.79
====== ======= ======= ======= ======= ======
Total Return(2) 0.37% 2.11% 3.12% 3.64% 7.56% 9.75%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $9,577 $13,426 $13,969 $22,555 $15,244 $8,320
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.70%
Ratio of Net Investment Income to Average Net
Assets 4.02% 3.85% 4.00% 3.79% 4.48% 4.55%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.27% 1.10% 1.06% 1.06% 1.11% 1.34%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.60% 3.60% 3.79% 3.58% 4.22% 3.91%
Portfolio Turnover Rate 17% 20% 4% 14% 15% 24%
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|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
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PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.72 $ 10.95 $ 11.05 $ 11.10 $ 10.76 $ 10.26
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.33 0.43 0.46 0.43 0.49 0.48
Realized and Unrealized Gains (Losses) on
Investments (0.28) (0.18) (0.11) (0.03) 0.33 0.49
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.05 0.25 0.35 0.40 0.82 0.97
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.33) (0.44) (0.45) (0.45) (0.48) (0.47)
Distributions (from net realized gains) (0.06) (0.04) -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.39) (0.48) (0.45) (0.45) (0.48) (0.47)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.38 $ 10.72 $ 10.95 $ 11.05 $ 11.10 $ 10.76
======= ======= ======= ======= ======= =======
Total Return(2) 0.49% 2.36% 3.29% 3.71% 7.83% 9.67%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $32,661 $34,562 $37,748 $47,854 $48,398 $47,907
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average Net
Assets 4.18% 4.01% 4.15% 3.94% 4.60% 4.58%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.02% 0.85% 0.81% 0.81% 0.86% 1.09%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.86% 3.86% 4.04% 3.83% 4.44% 4.19%
Portfolio Turnover Rate 17% 20% 4% 14% 15% 24%
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(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
INTERMEDIATE TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.92 $ 11.18 $ 11.30 $ 11.32 $ 10.95 $ 10.48
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.32 0.44 0.44 0.44 0.43 0.48
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.19) (0.10) (0.03) 0.40 0.46
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.06 0.25 0.34 0.41 0.83 0.94
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.32) (0.45) (0.45) (0.43) (0.43) (0.47)
Distributions (from net realized gains) (0.03) (0.06) (0.01) -- -- --
Distributions (from return of capital) -- -- -- -- (0.03) --
------- ------- ------- ------- ------- -------
Total Distributions (0.35) (0.51) (0.46) (0.43) (0.46) (0.47)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.63 $ 10.92 $ 11.18 $ 11.30 $ 11.32 $ 10.95
======= ======= ======= ======= ======= =======
Total Return(2) 0.56% 2.31% 3.06% 3.74% 7.78% 9.19%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $32,521 $34,658 $35,276 $34,231 $29,838 $23,236
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.70%
Ratio of Net Investment Income to Average Net
Assets 3.95% 3.98% 3.98% 3.91% 3.87% 4.43%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.05% 1.05% 1.05% 1.05% 1.03% 1.13%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.75% 3.78% 3.78% 3.71% 3.69% 4.00%
Portfolio Turnover Rate 15% 15% 10% 15% 28% 12%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.90 $ 11.16 $ 11.28 $ 11.30 $ 10.93 $ 10.46
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.33 0.46 0.46 0.46 0.44 0.48
Realized and Unrealized Gains (Losses) on
Investments (0.26) (0.19) (0.11) (0.03) 0.40 0.46
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.07 0.27 0.35 0.43 0.84 0.94
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.33) (0.47) (0.46) (0.45) (0.44) (0.47)
Distributions (from net realized gains) (0.03) (0.06) (0.01) -- -- --
Distributions (from return of capital) -- -- -- -- (0.03) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.36) (0.53) (0.47) (0.45) (0.47) (0.47)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.61 $ 10.90 $ 11.16 $ 11.28 $ 11.30 $ 10.93
======== ======== ======== ======== ======== ========
Total Return(2) 0.67% 2.47% 3.22% 3.90% 7.95% 9.21%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $596,306 $641,141 $637,361 $696,994 $485,592 $458,743
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average Net
Assets 4.10% 4.13% 4.13% 4.05% 4.04% 4.43%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.80% 0.80% 0.80% 0.80% 0.78% 0.87%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 4.00% 4.03% 4.03% 3.95% 3.96% 4.26%
Portfolio Turnover Rate 15% 15% 10% 15% 28% 12%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
MINNESOTA INTERMEDIATE TAX FREE FUND
Fiscal period
ended Fiscal year ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.16 $ 10.34 $ 10.44 $ 10.51 $ 10.21 $ 9.80
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.29 0.39 0.39 0.40 0.43 0.44
Realized and Unrealized Gains (Losses) on
Investments (0.22) (0.15) (0.08) (0.04) 0.29 0.41
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.07 0.24 0.31 0.36 0.72 0.85
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.29) (0.39) (0.39) (0.41) (0.42) (0.44)
Distributions (from net realized gains) (0.06) (0.03) (0.02) (0.02) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.35) (0.42) (0.41) (0.43) (0.42) (0.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 9.88 $ 10.16 $ 10.34 $ 10.44 $ 10.51 $ 10.21
======= ======= ======= ======= ======= =======
Total Return(2) 0.74% 2.33% 3.03% 3.55% 7.23% 8.85%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $26,526 $32,326 $35,047 $31,044 $19,914 $12,408
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.70%
Ratio of Net Investment Income to Average Net
Assets 3.85% 3.78% 3.77% 3.85% 4.27% 4.38%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.08% 1.06% 1.05% 1.05% 1.03% 1.13%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.62% 3.57% 3.57% 3.65% 4.09% 3.95%
Portfolio Turnover Rate 11% 15% 8% 15% 15% 13%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.11 $ 10.29 $ 10.40 $ 10.46 $ 10.17 $ 9.76
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income (0.30) 0.40 0.41 0.42 0.45 0.44
Realized and Unrealized Gains (Losses)
on Investments (0.22) (0.15) (0.10) (0.03) 0.27 0.41
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.08 0.25 0.31 0.39 0.72 0.85
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.30) (0.40) (0.40) (0.43) (0.43) (0.44)
Distributions (from net realized gains) (0.06) (0.03) (0.02) (0.02) -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.36) (0.43) (0.42) (0.45) (0.43) (0.44)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.83 $ 10.11 $ 10.29 $ 10.40 $ 10.46 $ 10.17
======== ======== ======== ======== ======== ========
Total Return(2) 0.85% 2.50% 3.10% 3.82% 7.31% 8.89%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $175,485 $197,251 $216,906 $238,958 $251,597 $255,939
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average
Net Assets 4.00% 3.93% 3.92% 4.01% 4.41% 4.38%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.83% 0.81% 0.80% 0.80% 0.78% 0.88%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.87% 3.82% 3.82% 3.91% 4.33% 4.20%
Portfolio Turnover Rate 11% 15% 8% 15% 15% 13%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
OREGON INTERMEDIATE TAX FREE FUND
Fiscal period
ended Fiscal period ended September 30,
CLASS A SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.07 $10.30 $10.43 $10.49 $10.18 $ 9.74
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.27 0.36 0.37 0.37 0.40 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.25) (0.19) (0.05) (0.03) 0.31 0.44
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.02 0.17 0.32 0.34 0.71 0.87
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.27) (0.36) (0.37) (0.38) (0.40) (0.43)
Distributions (from net realized gains) (0.04) (0.04) (0.08) (0.02) -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.31) (0.40) (0.45) (0.40) (0.40) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.78 $10.07 $10.30 $10.43 $10.49 $10.18
====== ====== ====== ====== ====== ======
Total Return(2) 0.16% 1.67% 3.20% 3.31% 7.23% 9.08%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $9,456 $9,356 $8,700 $8,189 $7,030 $5,477
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.70%
Ratio of Net Investment Income to Average Net
Assets 3.62% 3.56% 3.62% 3.67% 3.95% 4.27%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.11% 1.06% 1.05% 1.05% 1.05% 1.13%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.36% 3.35% 3.42% 3.47% 3.75% 3.84%
Portfolio Turnover Rate 13% 20% 12% 17% 18% 20%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return does not reflect sales charges. Total return would have been lower had certain expenses not been waived.
Fiscal period
ended Fiscal year ended September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.07 $ 10.30 $ 10.43 $ 10.49 $ 10.18 $ 9.74
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.28 0.38 0.39 0.40 0.42 0.43
Realized and Unrealized Gains (Losses)
on Investments (0.25) (0.19) (0.05) (0.05) 0.31 0.44
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.03 0.19 0.34 0.35 0.73 0.87
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.28) (0.38) (0.39) (0.39) (0.42) (0.43)
Distributions (from net realized gains) (0.04) (0.04) (0.08) (0.02) -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.32) (0.42) (0.47) (0.41) (0.42) (0.43)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.78 $ 10.07 $ 10.30 $ 10.43 $ 10.49 $ 10.18
======== ======== ======== ======== ======== ========
Total Return(2) 0.28% 1.82% 3.35% 3.46% 7.39% 9.08%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $111,344 $133,613 $137,869 $146,244 $151,928 $153,951
Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to Average
Net Assets 3.77% 3.71% 3.77% 3.82% 4.10% 4.28%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.86% 0.81% 0.80% 0.80% 0.80% 0.89%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.61% 3.60% 3.67% 3.72% 4.00% 4.09%
Portfolio Turnover Rate 13% 20% 12% 17% 18% 20%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in 2006, the fund's fiscal year end was changed from September 30 to June 30. All ratios for the period have been annualized, except total return and portfolio turnover.
(2)Total return would have been lower had certain expenses not been waived.
Additional Information
Financial Highlights CONTINUED
SHORT TAX FREE FUND
Fiscal year
Fiscal period ended Fiscal period
ended September 30, ended
CLASS A SHARES June 30, 2006(1) 2005 2004 September 30, 2003(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.78 $ 9.96 $10.18 $10.00
------- ------ ------ ------
Investment Operations:
Net Investment Income 0.19 0.24 0.26 0.26
Realized and Unrealized Gains (Losses) on Investments (0.09) (0.17) (0.17) 0.19
------- ------ ------ ------
Total From Investment Operations 0.10 0.07 0.09 0.45
------- ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.20) (0.25) (0.25) (0.27)
Distributions (from net realized gains) -- -- (0.06) --
------- ------ ------ ------
Total Distributions (0.20) (0.25) (0.31) (0.27)
------- ------ ------ ------
Net Asset Value, End of Period $ 9.68 $ 9.78 $ 9.96 $10.18
======= ====== ====== ======
Total Return(3) 1.02% 0.67% 0.90% 4.54%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 3,321 $4,103 $6,329 $6,448
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net Assets 2.65% 2.46% 2.55% 2.67%
Ratio of Expenses to Average Net Assets (excluding waivers) 1.08% 1.06% 1.05% 1.05%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 2.32% 2.15% 2.25% 2.37%
Portfolio Turnover Rate 22% 37% 30% 54%
---------------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in
2006, the fund's fiscal year end was changed from September 30 to June 30.
All ratios for the period have been annualized, except total return and
portfolio turnover.
(2)Commenced operations on October 25, 2002. All ratios for the period have been
annualized, except total return and portfolio turnover.
(3)Total return does not reflect sales charges. Total return would have been
lower had certain expenses not been waived.
Fiscal year Fiscal period
Fiscal period ended ended
ended September 30, September 30,
CLASS Y SHARES June 30, 2006(1) 2005 2004 2003(2)
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.78 $ 9.96 $ 10.18 $ 10.00
-------- -------- -------- --------
Investment Operations:
Net Investment Income 0.21 0.26 0.27 0.28
Realized and Unrealized Gains (Losses) on Investments (0.10) (0.18) (0.17) 0.18
-------- -------- -------- --------
Total From Investment Operations 0.11 0.08 0.10 0.46
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.21) (0.26) (0.26) (0.28)
Distributions (from net realized gains) -- -- (0.06) --
-------- -------- -------- --------
Total Distributions (0.21) (0.26) (0.32) (0.28)
-------- -------- -------- --------
Net Asset Value, End of Period $ 9.68 $ 9.78 $ 9.96 $ 10.18
======== ======== ======== ========
Total Return(3) 1.13% 0.83% 1.05% 4.66%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $235,900 $329,647 $419,359 $396,918
Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60%
Ratio of Net Investment Income to Average Net Assets 2.80% 2.62% 2.70% 3.00%
Ratio of Expenses to Average Net Assets (excluding waivers) 0.83% 0.81% 0.80% 0.80%
Ratio of Net Investment Income to Average Net Assets
(excluding waivers) 2.57% 2.41% 2.50% 2.80%
Portfolio Turnover Rate 22% 37% 30% 54%
-----------------------------------------------------------------------------------------------------------------------------
|
(1)For the nine-month period October 1, 2005 to June 30, 2006. Effective in
2006, the fund's fiscal year end was changed from September 30 to June 30.
All ratios for the period have been annualized, except total return and
portfolio turnover.
(2)Commenced operations on October 25, 2002. All ratios for the period have been
annualized, except total return and portfolio turnover.
(3)Total return would have been lower had certain expenses not been waived.
(FIRST AMERICAN FUNDS LOGO)
FOR MORE INFORMATION
More information about the First American Funds is available on the funds' Internet site at www.firstamericanfunds.com and in the following documents:
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds' annual and semiannual reports to shareholders. In the funds' annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies and is incorporated into this prospectus by reference (which means that it is legally part of this prospectus).
You can obtain a free copy of the funds' most recent annual or semiannual reports or the SAI, request other information about the funds, or make other shareholder inquiries by calling Investor Services at 800 677-3863 (FUND) or by contacting the funds at the address below. Annual or semiannual reports and the SAI are also available on the funds' Internet site.
Information about the funds (including the SAI) can also be reviewed and copied at the Securities and Exchange Commission's (SEC) Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the funds are also available on the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's
Public Reference Section, Washington, DC 20549-0102.
FIRST AMERICAN FUNDS
P.O. Box 1330
Minneapolis, MN 55440-1330
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 30, 2006
TAX FREE FUNDS
ARIZONA TAX FREE FUND
CALIFORNIA INTERMEDIATE TAX FREE FUND
CALIFORNIA TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
COLORADO TAX FREE FUND
INTERMEDIATE TAX FREE FUND
MINNESOTA INTERMEDIATE TAX FREE FUND
MINNESOTA TAX FREE FUND
MISSOURI TAX FREE FUND
NEBRASKA TAX FREE FUND
OHIO TAX FREE FUND
OREGON INTERMEDIATE TAX FREE FUND
SHORT TAX FREE FUND
TAX FREE FUND
BOND FUNDS
CORE BOND FUND
HIGH INCOME BOND FUND
INFLATION PROTECTED SECURITIES FUND
INTERMEDIATE GOVERNMENT BOND FUND
INTERMEDIATE TERM BOND FUND
SHORT TERM BOND FUND
TOTAL RETURN BOND FUND
U.S. GOVERNMENT MORTGAGE FUND
This Statement of Additional Information relates to the Class A, Class B, Class C, Class R and Class Y Shares of the funds named above (the "Funds"), each of which is a series of First American Investment Funds, Inc. ("FAIF"). This Statement of Additional Information is not a prospectus, but should be read in conjunction with the current Prospectuses dated October 30, 2006. The financial statements included as part of the Funds' Annual Reports to shareholders for the fiscal period ended June 30, 2006 for all funds are incorporated by reference into this Statement of Additional Information. This Statement of Additional Information is incorporated into the Funds' Prospectuses by reference. To obtain copies of Prospectuses or the Funds' Annual Report(s) at no charge, write the Funds' distributor, Quasar Distributors, LLC, 615 East Michigan Street, Milwaukee, WI 53202, or call Investor Services at 800 677-FUND. Please retain this Statement of Additional Information for future reference.
TABLE OF CONTENTS
PAGE
----------
GENERAL INFORMATION................................................ 1
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS................. 2
Short-Term Temporary Investments................................ 2
U.S. Government Securities...................................... 3
Repurchase Agreements........................................... 3
When-Issued and Delayed Delivery Transactions................... 4
Dollar Rolls.................................................... 4
Lending of Portfolio Securities................................. 4
Options Transactions............................................ 5
Futures and Options on Futures.................................. 7
CFTC Information................................................ 10
Foreign Securities.............................................. 10
Foreign Currency Transactions................................... 11
Mortgage-Backed Securities...................................... 13
Adjustable Rate Mortgage Securities............................. 15
Corporate Debt Securities....................................... 15
Asset-Backed Securities......................................... 16
Collateralized Debt Obligations................................. 16
Inflation Protected Securities.................................. 16
Municipal Bonds and Other Municipal Obligations................. 17
Temporary Taxable Investments................................... 19
Inverse Floating Rate Municipal Obligations..................... 19
Zero Coupon Securities.......................................... 19
Interest Rate Caps and Floors................................... 19
Swap Agreements................................................. 20
Guaranteed Investment Contracts................................. 21
Debt Obligations Rated Less than Investment Grade............... 21
Brady Bonds..................................................... 22
Fixed and Floating Rate Debt Obligations........................ 22
Payment-In-Kind Debentures and Delayed Interest Securities...... 22
Preferred Stock; Convertible Securities......................... 23
Trust Preferred Securities...................................... 23
Participation Interests......................................... 23
Exchange Traded Funds........................................... 23
Closed-End Investment Companies................................. 24
Special Factors Affecting Single State Tax Free Funds........... 24
INVESTMENT RESTRICTIONS............................................ 43
PORTFOLIO TURNOVER................................................. 45
FUND NAMES......................................................... 46
DISCLOSURE OF PORTFOLIO HOLDINGS................................... 46
Public Disclosure............................................... 46
Nonpublic Disclosure............................................ 46
DIRECTORS AND EXECUTIVE OFFICERS................................... 48
Independent Directors........................................... 48
|
Executive Officers.............................................. 49 Standing Committees of the Board of Directors................... 51 Fund Shares Owned by the Directors.............................. 53 Compensation.................................................... 53 Sales Loads..................................................... 54 CODE OF ETHICS..................................................... 54 PROXY VOTING POLICIES.............................................. 54 INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS............... 54 Investment Advisor.............................................. 54 Additional Payments to Financial Institutions................... 57 Administrator................................................... 60 Transfer Agent.................................................. 62 Distributor..................................................... 62 Custodians and Independent Registered Public Accounting Firm.... 67 PORTFOLIO MANAGERS................................................. 68 Compensation.................................................... 68 Ownership....................................................... 70 PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE................. 71 CAPITAL STOCK...................................................... 74 NET ASSET VALUE AND PUBLIC OFFERING PRICE.......................... 75 TAXATION........................................................... 78 REDUCING SALES CHARGES............................................. 79 Class A Sales Charge............................................ 79 Sales of Class A Shares at Net Asset Value...................... 80 Reinvestment Right.............................................. 81 ADDITIONAL INFORMATION ABOUT PURCHASING CLASS Y SHARES............. 81 ADDITIONAL INFORMATION ABOUT REDEEMING SHARES...................... 81 By Telephone.................................................... 81 By Mail......................................................... 82 Redemptions Before Purchase Instruments Clear................... 82 FINANCIAL STATEMENTS............................................... 82 RATINGS............................................................ Appendix A PROXY VOTING POLICIES AND PROCEDURES............................... Appendix B |
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 38 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. These series are referred to in this Statement of Additional Information as the "Funds."
For purposes of this Statement of Additional Information, "Bond Funds," and "Tax Free Funds" shall consist of the Funds identified as such on the cover of this Statement of Additional Information. The Funds are open-end management investment companies and, except for the Tax Free Funds (other than Tax Free Fund, Short Tax Free Fund and Intermediate Tax Free Fund), are diversified investment companies. The Tax Free Funds (other than Tax Free Fund, Short Tax Free Fund and Intermediate Tax Free Fund) are non-diversified investment companies.
Shareholders may purchase shares of each Fund through five separate classes, Class A, Class B (except for certain Bond Funds and the Tax Free Funds), Class C (except certain Bond Funds and certain Tax Free Funds), Class R (except for certain Bond Funds and the Tax Free Funds) 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, as amended ("1940 Act"), the Funds may also provide for variations in other costs among the classes. In addition, a sales load is imposed on the sale of Class A, Class B and Class C Shares of the Funds. Except for the foregoing differences among the classes pertaining to costs and fees, each share of each Fund represents an equal proportionate interest in that Fund.
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, among other things, all amendments to fundamental investment policies and restrictions, for approval of investment advisory contracts and amendments thereto, and for amendments to Rule 12b-1 distribution plans.
This Statement of Additional Information may also refer to affiliated investment companies, including: First American Funds, Inc. ("FAF"); First American Strategy Funds, Inc. ("FASF"); and eight separate closed-end funds (American Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.--II, American Strategic Income Portfolio Inc.--III, American Municipal Income Portfolio Inc., Minnesota Municipal Income Portfolio Inc., First American Minnesota Municipal Income Fund II, Inc., American Select Portfolio Inc., and American Income Fund, Inc.), collectively referred to as the First American Closed-End Funds ("FACEF").
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS
The principal investment strategies of each Fund are set forth in that Fund's Prospectuses. Additional information concerning principal investment strategies of the Funds, and other investment strategies that may be used by the Funds, is set forth below. The Funds have attempted to identify investment strategies that will be employed in pursuing each Fund's investment objective. However, in the absence of an affirmative limitation, a Fund may utilize any strategy or technique that is consistent with its investment objective. The Funds do not anticipate that any such strategy or technique would exceed 5% of a Fund's assets absent specific identification of that practice. Additional information concerning the Funds' investment restrictions is set forth below under "Investment Restrictions."
If a percentage limitation on investments by a Fund stated in this SAI or the Prospectuses is adhered to at the time of an investment, a later increase or decrease in percentage resulting from changes in asset value will not be deemed to violate the limitation except in the case of the limitations on borrowing. A Fund which is limited to investing in securities with specified ratings or of a certain credit quality is not required to sell a security if its rating is reduced or its credit quality declines after purchase, but the Fund may consider doing so. However, in no event will more than 5% of any Fund's net assets (other than High Income Bond Fund, Total Return Bond Fund, and Inflation Protected Securities Fund) be invested in non-investment grade securities. Descriptions of the rating categories of Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), Fitch, Inc. ("Fitch") and Moody's Investors Service, Inc. ("Moody's) are contained in Appendix A.
SHORT-TERM TEMPORARY INVESTMENTS
In an attempt to respond to adverse market, economic, political or other conditions, each of the Funds may temporarily invest without limit in a variety of short-term instruments such as rated commercial paper and variable amount master demand notes; United States dollar-denominated time and savings deposits (including certificates of deposit); bankers' acceptances; obligations of the United States Government or its agencies or instrumentalities; repurchase agreements collateralized by eligible investments of a Fund; securities of other mutual funds that invest primarily in debt obligations with remaining maturities of 13 months or less (which investments also are subject to an advisory fee); and other similar high-quality short-term United States dollar-denominated obligations. The other mutual funds in which the Funds may so invest include money market funds advised by FAF Advisors, Inc., the Funds' investment advisor (formerly known as U.S. Bancorp Asset Management, Inc.) ("FAF Advisors" or the "Advisor"), subject to certain restrictions contained in an exemptive order issued by the Securities and Exchange Commission ("SEC") with respect thereto.
Each of the Funds may also invest in 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. In each instance, these 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.
Short-term investments and repurchase agreements may be entered into on a joint basis by the Funds and other funds advised by the Advisor to the extent permitted by an exemptive order issued by the Securities and Exchange Commission with respect to the Funds. 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, Fitch or Moody's, or which have been assigned an equivalent rating by another nationally recognized statistical rating organization. The Funds also may invest in commercial paper that is not rated but that is determined by the Advisor to be of comparable quality to instruments that are so rated. For a description of the rating categories of Standard & Poor's, Fitch and Moody's, see Appendix A.
Bankers' Acceptances. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the full amount of the instrument upon maturity.
Variable Amount Master Demand Notes. Variable amount master demand notes are unsecured demand notes that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between a Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, a Fund may demand payment of principal and accrued interest at any time. While the notes are not typically rated by credit rating agencies, issuers of variable amount master demand notes (which are normally manufacturing, retail, financial, and other business concerns) must satisfy the same criteria as set forth above for commercial paper. The Advisor 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.
Variable Rate Demand Obligations. Variable rate demand obligations ("VRDO") are securities in which the interest rate is adjusted at pre-designated periodic intervals. VRDOs may include a demand feature which is a put that entitles the holder to receive the principal amount of the underlying security or securities and which may be exercised either at any time on no more than 30 days' notice or at specified intervals not exceeding 397 calendar days on no more than 30 days' notice.
U.S. GOVERNMENT SECURITIES
The Bond Funds, other than High Income Bond Fund, invest in U.S. government securities as a principal investment strategy. The other Funds may invest in such securities as a non-principal investment strategy. The U.S. government securities in which the Funds may invest are either issued or guaranteed by the U.S. government, its agencies or instrumentalities. The U.S. government securities in which the Funds invest 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 Funds 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 the 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. See "-- Mortgage-Backed Securities" below for a description of these securities and the Funds that may invest in them.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements as a non-principal investment strategy. A repurchase agreement involves the purchase by a Fund of securities with the agreement that after a stated period of time, the original seller will buy back the same securities ("collateral") at a predetermined price or yield. Repurchase agreements involve certain risks not associated with direct investments in securities. If the original seller defaults on its obligation to repurchase as a result of its bankruptcy or otherwise, the purchasing Fund will seek to sell the collateral, which could involve costs or delays. Although collateral (which may consist of any fixed income security which is an eligible
investment for the Fund entering into the repurchase agreement) will at all times be maintained in an amount equal to the repurchase price under the agreement (including accrued interest), a Fund would suffer a loss if the proceeds from the sale of the collateral were less than the agreed-upon repurchase price. The Advisor will monitor the creditworthiness of the firms with which the Funds enter into repurchase agreements.
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).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or delayed delivery basis as a non-principal investment strategy. When such a transaction is negotiated, the purchase price is fixed at the time the purchase commitment is entered, but delivery of and payment for the securities take place at a later date. A Fund will not accrue income with respect to securities purchased on a when-issued or delayed delivery basis prior to their stated delivery date. Pending delivery of the securities, each Fund will segregate cash or liquid securities in an amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis exposes a Fund to risk because the securities may decrease in value prior to delivery. In addition, a Fund's purchase of securities on a when-issued or delayed delivery basis while remaining substantially fully invested could increase the amount of the Fund's total assets that are subject to market risk, resulting in increased sensitivity of net asset value to changes in market prices. A seller's failure to deliver securities to a Fund could prevent the Fund from realizing a price or yield considered to be advantageous.
When a Fund agrees to purchase securities on a when-issued or delayed delivery basis, the Fund will segregate 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, its liquidity and the ability of the Advisor to manage it might be affected in the event its commitments to purchase when-issued or delayed delivery securities ever became significant. 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 total assets.
DOLLAR ROLLS
The Bond Funds other than Intermediate Government Bond Fund may enter into mortgage "dollar rolls" in which a 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. Core Bond Fund, Total Return Bond Fund and Intermediate Term Bond Fund do so as a principal investment strategy. In a mortgage dollar roll, a Fund gives up the right to receive principal and interest paid on the securities sold. However, the Fund would benefit to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase plus any fee income received. Unless such benefits exceed the income, capital appreciation and gain or loss due to mortgage prepayments that would have been realized on the securities sold as part of the mortgage dollar roll, the use of this technique will diminish the investment performance of the Fund compared with what such performance would have been without the use of mortgage dollar rolls. The Fund will segregate until the settlement date cash or liquid securities in an amount equal to the forward purchase price.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, as a non-principal investment strategy each of the Funds other than Intermediate Government Bond 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 Funds will only enter into domestic loan arrangements with broker-dealers, banks, or other institutions which the Advisor has determined are creditworthy under guidelines established by the Board of Directors. The Funds will pay a portion of the income earned on the lending transaction to the placing broker and may pay administrative and custodial fees in connection with these loans.
In these loan arrangements, the Funds will receive collateral in the form of cash, United States government securities or other high-grade debt obligations equal to at least 100% of the value of the securities loaned. This collateral must be valued daily by the Advisor or the applicable Fund's lending agent 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 at any time by the lending Fund or the borrower. 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.
When a Fund lends portfolio securities to a borrower, payments in lieu of dividends made by the borrower to the Fund will not constitute "qualified dividends" taxable at the same rate as long-term capital gains, even if the actual dividends would have constituted qualified dividends had the Fund held the securities. See "Taxation."
The Advisor acts as securities lending agent for the Funds and receives separate compensation for such services, subject to compliance with conditions contained in an SEC exemptive order permitting the Advisor to provide such services and receive such compensation. The Advisor receives fees equal to 32% of the Funds' income from securities lending transactions.
OPTIONS TRANSACTIONS
To the extent set forth below, the Funds may purchase put and call options on securities, stock indices, interest rate indices, commodity indices, and/or foreign currencies. These transactions will be undertaken for the purpose of reducing risk to the Funds; that is, for "hedging" purposes, or, in the case of options written by a Fund, to produce additional income. Options on futures contracts are discussed below under "-- Futures and Options on Futures."
Options on Securities. As a principal investment strategy, the Bond Funds (other than Intermediate Government Bond Fund) may purchase put and call options on securities they own or have the right to acquire. 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.
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.
Options on Stock, Interest Rate and Commodity Indices. As principal investment strategies, the Bond Funds (other than Intermediate Government Bond Fund) and the Tax Free Funds may purchase put and call options on interest rate indices and Inflation Protected Securities Fund may purchase put and call options on commodity indices. An option on an index gives the holder the right to receive, upon exercise of the option, an 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. 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. Settlements for index options are always in cash. Gain or loss depends on market movements with respect to specific financial instruments or commodities. The multiplier for 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 index. Options on different indices may have different multipliers.
Options on Currencies. Foreign currency options are discussed in detail below under " -- Foreign Currency Transactions - Foreign Currency Options."
Writing Options--Inflation Protected Securities Fund. Inflation Protected Securities Fund may write (sell) covered put and call options as a principal investment strategy. These transactions would be undertaken principally to produce additional income. The Fund may write covered straddles consisting of a combination of a call and a put written on the same underlying instrument.
Covered Options. The Funds will write options only if they are "covered." In the case of a call option on a security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other liquid assets in such amount are segregated) upon conversion or exchange of the securities held by the Fund. For a call option on an index or currency, the option is covered if the Fund segregates liquid assets in an amount equal to the contract value of the index or currency. A call option is also covered if the Fund holds a call on the same security, index or currency as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated liquid assets. A put option on a security, currency or index is "covered" if the Fund segregates liquid assets equal to the exercise price. A put option is also covered if the Fund holds a put on the same security, currency or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in segregated liquid assets. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
Expiration or Exercise of Options. If an option written by a Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security, currency or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
A Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security, currency or index in relation to the exercise price of the option, the volatility of the underlying security, currency or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of the Fund. The premium received for an option written by a Fund is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked price.
Risks Associated with Options Transactions. There are several risks associated with options transactions. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether,
when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill it obligations as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. If a put or call option purchased by a Fund is not sold when it has remaining value, and if the market price of the underlying security remains equal to or greater than the exercise price (in the case of a put) or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.
If trading were suspended in an option purchased by a Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, a Fund might be unable to exercise an option it had purchased. Except to the extent that a call option on an index written by a Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
Limitations. None of the Funds will invest more than 5% of the value of its total assets in purchased options, provided that options which are "in the money" at the time of purchase may be excluded from this 5% limitation. A call option is "in the money" if the exercise price is lower than the current market price of the underlying security or index, and a put option is "in the money" if the exercise price is higher than the current market price. A Fund's loss exposure in purchasing an option is limited to the sum of the premium paid and the commission or other transaction expenses associated with acquiring the option.
FUTURES AND OPTIONS ON FUTURES
The Funds other than Intermediate Government Bond Fund may engage in futures transactions and options on futures as a principal investment strategy, including stock and interest rate index futures contracts and options thereon and, with respect to Inflation Protected Securities Fund only, commodity and commodity index futures contracts and options thereon. Certain Funds may also enter into foreign currency futures transactions, which are discussed in more detail below under " --Foreign Currency Transactions."
A futures contract is an agreement between two parties to buy and sell a security or commodity for a set price on a future date. These contracts are traded on exchanges, so that, in most cases, either party can close out its position on the exchange for cash, without delivering the security or commodity. An option on a futures contract gives the holder of the option the right to buy or sell a position in a futures contract to the writer of the option, at a specified price and on or before a specified expiration date.
An interest rate, commodity, foreign currency or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, commodity, foreign currency or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. Inflation Protected Securities Fund may also invest in commodity futures contracts and options thereon. A commodity futures contract is an agreement between two parties, in which one party agrees to buy a
commodity, such as an energy, agricultural or metal commodity from the other party at a later date at a price and quantity agreed upon when the contract is made.
Futures options possess many of the same characteristics as options on
securities, currencies and indexes (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.
The Funds intend generally to use futures contracts and futures options to hedge against market risk. For example, a Bond Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Fund's securities or the price of the securities that the Fund intends to purchase. The Fund's hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce a Fund's exposure to interest rate fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Funds will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of liquid assets ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. Margin requirement on foreign exchanges may be modified during the term of the contract. Margin requirements on foreign exchanges may be different than U.S. exchanges. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Fund expects to earn interest income on its initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Fund.
Futures transactions also involve brokerage costs and the Fund may have to segregate additional liquid assets in accordance with applicable SEC requirements.
Although some futures contracts call for making or taking delivery of the underlying currency, securities or commodities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying currency, security or commodity, and delivery month). Closing out a futures contract sale is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity with the same delivery date. If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
The Funds may write covered straddles consisting of a call and a put written on the same underlying futures contract. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations.
Limitations on Use of Futures and Futures Options. Aggregate initial margin deposits for futures contracts, and premiums paid for related options, may not exceed 5% of a Fund's total assets. Futures transactions will be limited to the extent necessary to maintain a Fund's qualification as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code").
Risks Associated with Futures and Futures Options. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Risks Associated with Commodity Futures Contracts. There are several additional risks associated with transactions in commodity futures contracts.
Storage. Unlike the financial futures markets, in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while the Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
Reinvestment. In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for Inflation Protected Securities Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for the Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
Other Economic Factors. The commodities which underlie commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors may have a larger impact on
commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors. Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject Inflation Protected Securities Fund's investments to greater volatility than investments in traditional securities.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal agency, regulates trading activity pursuant to the Commodity Exchange Act, as amended (the "CEA"). The CFTC requires the registration of a Commodity Pool Operator (a "CPO"), which is 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 files a notice of eligibility. The Funds have filed a notice of eligibility claiming exclusion from the status of CPO and, therefore, are not subject to registration or regulation as a CPO under the CEA.
FOREIGN SECURITIES
General. Short Term Bond Fund, Intermediate Term Bond Fund, Core Bond Fund, Total Return Bond Fund, High Income Bond Fund and Inflation Protected Securities Fund may invest in foreign securities as a principal investment strategy.
Short Term Bond Fund, Intermediate Term Bond Fund, Core Bond Fund, and High Income Bond Fund may invest up to 25% of total assets, and Inflation Protected Securities Fund and Total Return Bond Fund each may invest without limitation, in foreign securities payable in United States dollars. These securities may include securities issued or guaranteed by (i) the Government of Canada, any Canadian Province or any instrumentality and political subdivision thereof; (ii) any other foreign government agency or instrumentality; (iii) foreign subsidiaries of U.S. corporations and (iv) foreign issuers having total capital and surplus at the time of investment of at least $1 billion. In addition, Inflation Protected Securities Fund may invest up to 20% of its net assets and Total Return Bond Fund may invest up to 20% of its total assets in non-dollar denominated foreign securities.
Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of United States domestic issuers. These risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed settlements). Foreign securities also may be subject to greater fluctuations in price than securities issued by United States corporations. The principal markets on which these securities trade may have less volume and liquidity, and may be more volatile, than securities markets in the United States.
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 record keeping standards than those applicable to domestic branches of United States banks and United States domestic issuers.
Emerging Markets. Total Return Bond Fund may invest in securities issued by the governmental and corporate issuers that are located in emerging market countries as a principal investment strategy. Core Bond Fund, High Income Bond Fund, Inflation Protected Securities Fund, Intermediate Term Bond Fund, and Short Term Bond Fund may invest in such securities as a non-principal investment strategy, but only if the securities are rated investment grade. Investments in securities of issuers in emerging market countries may be subject to potentially higher risks than investments in developed countries. These risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or nonexistent volume of trading, which may result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vi) the limited development and recent emergence, in certain countries, of a capital market structure or market-oriented economy; and (vii) the possibility that recent favorable economic developments in certain countries may be slowed or reversed by unanticipated political or social events in such countries.
Despite the dissolution of the Soviet Union, the Communist Party may continue to exercise a significant role in certain (particularly Eastern European) countries. To the extent of the Communist Party's influence, investments in such countries will involve risks of nationalization, expropriation and confiscatory taxation. The communist governments of a number of such countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that such expropriation will not occur in the future. In the event of such expropriation, the Fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in many developing countries. Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to Fund shareholders.
Certain countries, which do not have market economies, are characterized by an absence of developed legal structures governing private and foreign investments and private property. Certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment of foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals.
Authoritarian governments in certain countries may require that a governmental or quasi-governmental authority act as custodian of the Fund's assets invested in such country. To the extent such governmental or quasi-governmental authorities do not satisfy the requirements of the 1940 Act to act as foreign custodians of the Fund's cash and securities, the Fund's investment in such countries may be limited or may be required to be effected through intermediaries. The risk of loss through governmental confiscation may be increased in such countries.
American Depositary Receipts and European Depositary Receipts. United States dollar-denominated American Depositary Receipts, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. American Depositary Receipts represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. American Depositary Receipts do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in American Depositary Receipts rather than directly in foreign issuers' stock, a Fund can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many American Depositary Receipts. The information available for American Depositary Receipts is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. International Fund also may invest in European Depositary Receipts, which are receipts evidencing an arrangement with a European bank similar to that for American Depositary Receipts and which are designed for use in the European securities markets. European Depositary Receipts are not necessarily denominated in the currency of the underlying security.
Certain American Depositary Receipts and European Depositary Receipts, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of the facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through voting rights.
FOREIGN CURRENCY TRANSACTIONS
Inflation Protected Securities Fund and Total Return Bond Fund may invest in securities which are purchased and sold in foreign currencies. The value of the Funds' assets as measured in United States dollars therefore may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The
Funds also will incur costs in converting United States dollars to local currencies, and vice versa. Inflation Protected Securities Fund and Total Return Bond Fund therefore may enter into foreign currency transactions as a principal investment strategy.
The Funds will conduct their foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract involves an obligation to purchase or sell an amount of a specific currency at a specific price on a future date agreed upon by the parties. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers.
The Funds may enter into forward currency contracts in order to hedge against adverse movements in exchange rates between currencies. The Funds may engage in "transaction hedging" to protect against a change in the foreign currency exchange rate between the date a Fund contracts to purchase or sell a security and the settlement date, or to "lock in" the United States dollar equivalent of a dividend or interest payment made in a foreign currency. They also may engage in "portfolio hedging" to protect against a decline in the value of their portfolio securities as measured in United States dollars which could result from changes in exchange rates between the United States dollar and the foreign currencies in which the portfolio securities are purchased and sold. The Funds also may hedge foreign currency exchange rate risk by engaging in currency futures and options transactions.
Although a foreign currency hedge may be effective in protecting a Fund from losses resulting from unfavorable changes in exchanges rates between the United States dollar and foreign currencies, it also would limit the gains which might be realized by the Fund from favorable changes in exchange rates. The Advisor's decision whether to enter into currency hedging transactions will depend in part on its view regarding the direction and amount in which exchange rates are likely to move. The forecasting of movements in exchange rates is extremely difficult, so that it is highly uncertain whether a hedging strategy, if undertaken, would be successful. To the extent that the advisor's view regarding future exchange rates proves to have been incorrect, a Fund may realize losses on its foreign currency transactions.
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. A Fund will not enter into such forward contracts or maintain a net exposure in such contracts where it would be obligated to deliver an amount of foreign currency in excess of the value of its securities or other assets denominated in that currency. Each Fund will comply with applicable SEC positions requiring it to segregate assets to cover its commitments with respect to such contracts. 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 their financial futures transactions, Inflation Protected Securities Fund and Total Return Bond Fund may use foreign currency futures contracts and options on such futures contracts. Through the purchase or sale of such contracts, the Funds may be able to achieve many of the same objectives as through investing in forward foreign currency exchange contracts.
Foreign Currency Options. A foreign currency option provides the option buyer with the right to buy or sell a stated amount of foreign currency at the exercise price at a specified date or during the option period. A call option gives its owner the right, but not the obligation, to buy the currency, while a put option gives its owner the right, but not the obligation, to sell the currency. The option seller (writer) is obligated to fulfill the terms of the option sold if it is exercised. However, either seller or buyer may close its position during the option period in the secondary market for such options at any time prior to expiration.
A foreign currency call option rises in value if the underlying currency appreciates. Conversely, a foreign currency put option rises in value if the underlying currency depreciates. While purchasing a foreign currency option may protect a Fund against an adverse movement in the value of a foreign currency, it would 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
The Bond Funds other than High Income Bond Fund and Intermediate Government Bond Fund may invest in mortgage-backed securities as a principal investment strategy. High Income Bond Fund may invest in such securities as a non-principal investment strategy. These investments include Agency Pass-Through Certificates, private pass-through securities, and collateralized mortgage obligations ("CMOs"), as defined and described below.
Agency Pass-Through Certificates are mortgage pass-through certificates representing undivided interests in pools of residential mortgage loans. Distribution of principal and interest on the mortgage loans underlying an Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA, FNMA or 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 FHLMC's operations or to assist FHLMC in any other manner.
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.
The residential mortgage loans evidenced by Agency Pass-Through Certificates and upon which CMOs are based generally are secured by first mortgages on one- to four-family residential dwellings. Such mortgage loans generally have final maturities ranging from 15 to 30 years and provide for monthly payments in amounts sufficient to amortize their original principal amounts by the maturity dates. Each monthly payment on such mortgage loans generally includes both an interest component and a principal component, so that the holder of the mortgage loans receives both interest and a partial return of principal in each monthly payment. In general, such mortgage loans can be prepaid by the borrowers at any time without any prepayment penalty. In addition, many such mortgage loans contain a "due-on-sale" clause requiring the loans to be repaid in full upon the sale of the property securing the loans. Because residential mortgage loans generally provide for monthly amortization and may be prepaid in full at any time, the weighted average maturity of a pool of residential mortgage loans is likely to be substantially shorter than its stated final maturity date. The rate at which a pool of residential mortgage loans is prepaid may be influenced by many factors and is not predictable with precision.
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 commercial fixed rate, 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 FHLMC, 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 provisions 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 Funds will invest only in CMOs which are rated in one of the four highest rating categories by a nationally recognized statistical rating organization or which are of comparable quality in the judgment of the Advisor. Because CMOs are debt obligations of private entities, payments on CMOs generally are not obligations of or guaranteed by any governmental entity, and their ratings and creditworthiness typically depend, among other factors, on the legal insulation of the issuer and transaction from the consequences of a sponsoring entity's bankruptcy.
CMOs generally are issued in multiple classes, with holders of each class entitled to receive specified portions of the principal payments and prepayments and/or of the interest payments on the underlying mortgage loans. These entitlements can be specified in a wide variety of ways, so that the payment characteristics of various classes may differ greatly from one another. For instance, holders may hold interests in CMO tranches called Z-tranches which defer interest and principal payments until one or other classes of the CMO have been paid in full. In addition, 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.
- 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.
It generally is more difficult to predict the effect of changes in market interest rates on the return on mortgage-backed securities than to predict the effect of such changes on the return of a conventional fixed-rate debt instrument, 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. None of the Funds will invest more than 10% of its total assets in interest-only, principal-only, inverse interest only or inverse floating rate mortgage-backed securities.
ADJUSTABLE RATE MORTGAGE SECURITIES
The Bond Funds, other than Intermediate Government Bond Fund, may invest in adjustable rate mortgage securities ("ARMS") as a non-principal investment strategy. ARMS are pass-through mortgage securities collateralized by mortgages with interest rates that are adjusted from time to time. ARMS also include adjustable rate tranches of CMOs. The adjustments usually are determined in accordance with a predetermined interest rate index and may be subject to certain limits. While the values of ARMS, like other debt securities, generally vary inversely with changes in market interest rates (increasing in value during periods of declining interest rates and decreasing in value during periods of increasing interest rates), the values of ARMS should generally be more resistant to price swings than other debt securities because the interest rates of ARMS move with market interest rates. The adjustable rate feature of ARMS will not, however, eliminate fluctuations in the prices of ARMS, particularly during periods of extreme fluctuations in interest rates.
ARMS typically have caps which limit the maximum amount by which the interest rate may be increased or decreased at periodic intervals or over the life of the loan. To the extent interest rates increase in excess of the caps, ARMS can be expected to behave more like traditional debt securities and to decline in value to a greater extent than would be the case in the absence of such caps. Also, since many adjustable rate mortgages only reset on an annual basis, it can be expected that the prices of ARMS will fluctuate to the extent changes in prevailing interest rates are not immediately reflected in the interest rates payable on the underlying adjustable rate mortgages. The extent to which the prices of ARMS fluctuate with changes in interest rates will also be affected by the indices underlying the ARMS.
CORPORATE DEBT SECURITIES
The Bond Funds, other than Intermediate Government Bond Fund and U.S. Government Mortgage Fund, may invest in corporate debt securities as a principal investment strategy. U.S. Government Mortgage Fund may invest in such securities as a non-principal investment strategy. Corporate debt securities are fully taxable debt obligations issued by corporations. These securities fund capital improvements, expansions, debt refinancing or acquisitions that require more capital than would ordinarily be available from a single lender. Investors in corporate debt securities lend money to the issuing corporation in exchange for interest payments and repayment of the principal at a set maturity date. Rates on corporate debt securities are set according to prevailing interest rates at the time of the issue, the credit rating of the issuer, the length of the maturity and other terms of the security, such as a call feature. Corporate debt securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity. In addition, corporate restructurings, such as mergers, leveraged buyouts, takeovers or similar corporate transactions are often financed by an increase in a corporate issuer's debt securities. As a result of the added debt burden, the credit quality and market value of an issuer's existing debt securities may decline significantly.
ASSET-BACKED SECURITIES
Core Bond Fund, Total Return Bond Fund, Intermediate Term Bond Fund, Short Term Bond Fund and Inflation Protected Securities Fund may invest in asset-backed securities as a principal investment strategy. High Income Bond Fund and U.S. Government Mortgage Fund may invest in such securities as a non-principal investment strategy. 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.
COLLATERALIZED DEBT OBLIGATIONS
The Bond Funds, other than Intermediate Government Bond Fund and U.S. Government Mortgage Securities Fund, may invest in Collateralized Debt Obligations ("CDOs") as a non-principal investment strategy. Similar to CMOs, CDOs are debt obligations typically issued by a private special-purpose entity and collateralized principally by debt securities (including, for example, high-yield, high-risk bonds, structured finance securities including asset-backed securities, CDOs, mortgage-backed securities and REITs) or corporate loans. The special purpose entity typically issues one or more classes (sometimes referred to as "tranches") of rated debt securities, one or more unrated classes of debt securities that are generally treated as equity interests, and a residual equity interest. The tranches of CDOs typically have different interest rates, projected weighted average lives and ratings, with the higher rated tranches paying lower interest rates. One or more forms of credit enhancement are almost always necessary in a CDO structure to obtain the desired credit ratings for the most highly rated debt securities issued by the CDO. The types of credit enhancement used include "internal" credit enhancement provided by the underlying assets themselves, such as subordination, excess spread and cash collateral accounts, hedges provided by interest rate swaps, and "external" credit enhancement provided by third parties, principally financial guaranty insurance issued by monoline insurers. Despite this credit enhancement, CDO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and the disappearance of lower rated protecting tranches, market anticipation of defaults, as well as aversion to CDO securities as a class. CDOs can be less liquid than other publicly held debt issues, and require additional structural analysis.
INFLATION PROTECTED SECURITIES
Inflation Protected Securities Fund invests in inflation protected securities as a principal investment strategy. The other Bond Funds may invest in such securities as a non-principal investment strategy. Inflation protected securities are fixed income securities designed to provide protection against the negative effects of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
Inflation protected securities issued by the U.S. Treasury have maturities of five, ten, twenty or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if the Fund purchased an inflation protected bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole years' inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of U.S. Treasury inflation protected securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation protected bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. Other inflation-protected
securities that accrue inflation into their principal value may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-protected securities is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected securities. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-protected securities.
The periodic adjustment of U.S. inflation protected bonds is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation protected securities issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. If the market perceives that the adjustment mechanism of an inflation-protected security does not accurately adjust for inflation, the value of the security could be adversely affected.
While inflation protected securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. The calculation of the inflation index ratio for inflation protected securities issued by the U.S. Treasury incorporates an approximate three-month lag, which may have an effect on the trading price of the securities, particularly during periods of significant, rapid changes in the inflation index. To the extent that inflation has increased during the three months prior to an interest payment, that interest payment will not be protected from the inflation increase. Further, to the extent that inflation has increased during the final three months of a security's maturity, the final value of the security will not be protected against that increase, which will negatively impact the value of the security. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in inflation-protected securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure.
Any increase in the principal amount of an inflation-protected security will be considered taxable income to the Fund, even though the Fund does not receive its principal until maturity.
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS
The Tax Free Funds invest principally in municipal bonds and other municipal obligations. These bonds and other obligations are issued by the states and by their local and special-purpose political subdivisions. The term "municipal bond" includes short-term municipal notes issued by the states and their political subdivisions.
Municipal Bonds. The two general classifications of municipal bonds are "general obligation" bonds and "revenue" bonds. General obligation bonds are secured by the governmental issuer's pledge of its faith, credit and taxing power for the payment of principal and interest upon a default by the issuer of its principal and interest payment obligations. They are usually paid from general revenues of the issuing governmental entity. Revenue bonds, on the other hand, are usually payable only out of a specific revenue source rather than from general revenues. Revenue bonds ordinarily are not backed by the faith, credit or general taxing power of the issuing governmental entity. The principal and interest on revenue bonds for private facilities are typically paid out of rents or other specified payments made to the issuing governmental entity by a private company which uses or operates the facilities. Examples of these types of obligations are industrial revenue bond and pollution control revenue bonds. Industrial revenue bonds are issued by governmental entities to provide financing aid to community facilities such as hospitals, hotels, business or residential complexes, convention halls and sport complexes. Pollution control revenue bonds are issued to finance air, water and solids pollution control systems for privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of the credit, general revenues or taxing powers of issuing governmental entity. Instead, the private company operating the facility is the sole source of payment of the obligation. Sometimes, the funds for payment of revenue bonds come solely from revenue generated by operation
of the facility. Revenue bonds which are not backed by the credit of the issuing governmental entity frequently provide a higher rate of return than other municipal obligations, but they entail greater risk than obligations which are guaranteed by a governmental unit with taxing power. Federal income tax laws place substantial limitations on industrial revenue bonds, and particularly certain specified private activity bonds issued after August 7, 1986. In the future, legislation could be introduced in Congress which could further restrict or eliminate the income tax exemption for interest on debt obligations in which the Funds may invest.
Refunded Bonds. With the exception of Nebraska Tax Free Fund, the Tax Free Funds may not invest more than 25% of Fund assets in unrated securities. Investments in refunded bonds are excluded from this limitation. Refunded bonds may have originally been issued as general obligation or revenue bonds, but become refunded when they are secured by an escrow fund, usually consisting entirely of direct U.S. government obligations and/or U.S. government agency obligations sufficient for paying the bondholders. For the purposes of excluding refunded bonds from the 25% limitation on unrated securities in the Tax Free Funds, there are two types of refunded bonds: pre-refunded bonds and escrowed-to-maturity ("ETM") bonds.
The escrow fund for a pre-refunded municipal bond may be structured so that the refunded bonds are to be called at the first possible date or a subsequent call date established in the original bond debenture. The call price usually includes a premium from one to three percent above par. This type of structure usually is used for those refundings that either reduce the issuer's interest payment expenses or change the debt maturity schedule. In escrow funds for ETM refunded municipal bonds, the maturity schedules of the securities in the escrow funds match the regular debt-service requirements on the bonds as originally stated in the bond indentures.
Derivative Municipal Securities. Tax Free Funds may also acquire derivative municipal securities, which are custodial receipts of certificates underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain municipal securities. The underwriter of these certificates or receipts typically purchases municipal securities and deposits them in an irrevocable trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the obligation.
The principal and interest payments on the municipal securities underlying custodial receipts may be allocated in a number of ways. For example, payments may be allocated such that certain custodial receipts may have variable or floating interest rates and others may be stripped securities which pay only the principal or interest due on the underlying municipal securities. Tax Free Funds may each invest up to 10% of their total assets in custodial receipts which have inverse floating interest rates and other inverse floating rate municipal obligations.
Municipal Leases. The Tax Free Funds also may purchase participation interests in municipal leases. Participation interests in municipal leases are undivided interests in a lease, installment purchase contract or conditional sale contract entered into by a state or local governmental unit to acquire equipment or facilities. Municipal leases frequently have special risks which generally are not associated with general obligation bonds or revenue bonds.
Municipal leases and installment purchase or conditional sales contracts (which usually provide for title to the leased asset to pass to the governmental issuer upon payment of all amounts due under the contract) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of municipal debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases and contracts of "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body on a yearly or other periodic basis. Although these kinds of obligations are secured by the leased equipment or facilities, the disposition of the pledged property in the event of non-appropriation or foreclosure might, in some cases, prove difficult and time-consuming. In addition, disposition upon non-appropriation or foreclosure might not result in recovery by a Fund of the full principal amount represented by an obligation.
In light of these concerns, the Tax Free Funds have adopted and follow procedures for determining whether municipal lease obligations purchased by the Funds are liquid and for monitoring the liquidity of municipal lease securities held in each Fund's portfolio. These procedures require that a number of factors be used in evaluating the liquidity of a municipal lease security, including the frequency of trades and quotes for the security, the number of dealers willing to purchase or sell the security and the number of other potential purchasers, the willingness of dealers to
undertake to make a market in security, the nature of the marketplace in which the security trades, and other factors which the Advisor may deem relevant. As set forth in "Investment Restrictions" below, each such Fund is subject to limitations on the percentage of illiquid securities it can hold.
TEMPORARY TAXABLE INVESTMENTS
The Tax Free Funds may make temporary taxable investments. Temporary taxable investments will include only the following types of obligations maturing within 13 months from the date of purchase: (i) obligations of the United States Government, its agencies and instrumentalities (including zero coupon securities); (ii) commercial paper rated not less than A-1 by Standard & Poor's, F1 by Fitch or P-1 by Moody's or which has been assigned an equivalent rating by another nationally recognized statistical rating organization; (iii) other short-term debt securities issued or guaranteed by corporations having outstanding debt rated not less than BBB- by Standard & Poor's or Fitch or Baa3 by Moody's or which have been assigned an equivalent rating by another nationally recognized statistical rating organization; (iv) certificates of deposit of domestic commercial banks subject to regulation by the United States Government or any of its agencies or instrumentalities, with assets of $500 million or more based on the most recent published reports; and (v) repurchase agreements with domestic banks or securities dealers involving any of the securities which the Fund is permitted to hold.
INVERSE FLOATING RATE MUNICIPAL OBLIGATIONS
Each of the Tax Free Funds, as a principal investment strategy, may invest up to 10% of its total assets in inverse floating rate municipal obligations. An inverse floating rate obligation entitles the holder to receive interest at a rate which changes in the opposite direction from, and in the same magnitude as or in a multiple of, changes in a specified index rate. Although an inverse floating rate municipal obligation would tend to increase portfolio income during a period of generally decreasing market interest rates, its value would tend to decline during a period of generally increasing market interest rates. In addition, its decline in value may be greater than for a fixed-rate municipal obligation, particularly if the interest rate borne by the floating rate municipal obligation is adjusted by a multiple of changes in the specified index rate. For these reasons, inverse floating rate municipal obligations have more risk than more conventional fixed-rate and floating rate municipal obligations.
ZERO COUPON SECURITIES
The Bond Funds and the Tax Free Funds may invest in zero coupon, fixed income securities. The Tax Free Funds do so as a principal investment strategy. The Bond Funds do so as a non-principal investment strategy. 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. In addition, while zero coupon securities generate income for purposes of generally accepted accounting standards, they do not generate cash flow and thus could cause a 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").
INTEREST RATE CAPS AND FLOORS
As a principal investment strategy, the Bond Funds other than Intermediate Government Bond Fund may purchase or sell interest rate caps and floors to preserve a return or a spread on a particular investment or portion of its portfolio or for other non-speculative purposes. The Tax Free Funds may do so as a non-principal investment strategy. The purchase of an interest rate cap entitles the purchaser, to the extent a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling such interest rate floor.
SWAP AGREEMENTS
The Bond Funds other than Intermediate Government Bond Fund may enter into interest rate, total return and credit default swap agreements as a principal investment strategy. These Funds may also enter into options on the foregoing types of swap agreements ("swap options") and in bonds issued by special purpose entities that are backed by a pool of swaps.
Swap agreements are two party contracts entered into primarily by institutional investors for a specified period of time. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on a particular predetermined investment or index. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a basket of securities representing a particular index. A swap option is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap agreement at some designated future time on specified terms. The Funds may write (sell) and purchase put and call swap options.
Interest rate swaps involve the exchange of a fixed rate of interest for a floating rate of interest, usually over a one- to ten-year term. In a total return swap, one party agrees to pay the other the "total return" of a defined underlying asset, usually in return for a specified fixed or floating cash flow unrelated to the credit worthiness of the underlying asset. A total return swap may be applied to any underlying asset but is most commonly used with equity indices, single stocks, bonds and defined portfolios of loans and mortgages. Credit default swaps involve the exchange of a monthly interest rate spread over a period of time for the risk of default by an individual corporate borrower or with respect to a basket of securities.
One example of the use of swaps within a Fund may be to manage the interest rate sensitivity of the Fund. The Fund might receive or pay a fixed interest rate of a particular maturity and pay or receive a floating rate in order to increase or decrease the duration of the Fund. Or, the Fund may buy or sell swap options to effect the same result. The Fund may also replicate a security by selling it, placing the proceeds in cash deposits, and receiving a fixed rate in the swap market.
Another example of the use of swaps within a Fund is the use of credit default swaps to buy or sell credit protection. A credit default swap is a bilateral contract that enables an investor to buy or sell protection against a defined-issuer credit event. The seller of credit protection against a security or basket of securities receives an upfront or periodic payment to compensate against potential default events. The Fund may enhance income by selling protection or protect credit risk by buying protection. Market supply and demand factors may cause distortions between the cash securities market and the credit default swap market. The credit protection market is still relatively new and should be considered illiquid.
A Fund might enter into a total return swap involving an underlying index or basket of securities to create exposure to a potentially widely-diversified range of securities in a single trade. An index total return swap can be used by a portfolio manager to assume risk, without the complications of buying the component securities from what may not always be the most liquid of markets.
Most swap agreements entered into by a Fund would calculate the obligations of the parties to the agreement on a "net basis." Consequently, a Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). A Fund's current obligations under a net swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by assets determined to be liquid by the Advisor.
The use of swap agreements by a Fund entails certain risks. Interest rate swaps could result in losses if interest rate changes are not correctly anticipated by the Fund. Total return swaps could result in losses if the underlying asset does not perform as anticipated by the fund. Credit default swaps could result in losses if the Fund does not correctly evaluate the creditworthiness of the company or companies on which the credit default swap is based.
A Fund will generally incur a greater degree of risk when it writes a swap option than when it purchases a swap option. When a Fund purchases a swap option it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swap option it will be obligated, upon exercise of the option, according to the terms of the underlying agreement.
Because swaps are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
GUARANTEED INVESTMENT CONTRACTS
Short Term Bond Fund may purchase investment-type insurance products such as Guaranteed Investment Contracts ("GICs") as a non-principal investment strategy. A GIC is a deferred annuity under which the purchaser agrees to pay money to an insurer (either in a lump sum or in installments) and the insurer promises to pay interest at a guaranteed rate for the life of the contract. GICs may have fixed or variable interest rates. A GIC is a general obligation of the issuing insurance company. The purchase price paid for a GIC becomes part of the general assets of the insurer, and the contract is paid at maturity from the general assets of the insurer. In general, GICs are not assignable or transferable without the permission of the issuing insurance companies and can be redeemed before maturity only at a substantial discount or penalty. GICs, therefore, are usually considered to be illiquid investments. Short Term Bond Fund will purchase only GICs which are obligations of insurance companies with a policyholder's rating of A or better by A.M. Best Company.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
Total Return Bond Fund, Inflation Protected Securities Fund and the Tax Free Funds may invest in both investment grade and non-investment grade debt obligations. High Income Bond Fund invests primarily in non-investment grade debt obligations. Debt obligations rated less than "investment grade" are sometimes referred to as "high yield securities" or "junk bonds." To be consistent with the ratings methodology used by Lehman Brothers, the provider of the benchmarks of the Bond Funds, a debt obligation is considered to be rated "investment grade" if two of Moody's, Standard & Poor's and Fitch rate the security investment-grade (i.e. at least Baa3, BBB- and BBB-, respectively). If ratings are provided by only two of those rating agencies, the more conservative rating is used to determine whether the security is investment-grade. If only one of those rating agencies provides a rating, that rating is used. Inflation Protected Securities Fund and the Tax Free Funds may invest in non-investment grade debt obligations rated at least B- by two of Standard & Poor's, Moody's and Fitch, unless only one of those rating agencies rates the security, in which case that rating must be at least B-, or in unrated securities determined to be of comparable quality by the Advisor. Total Return Bond Fund may not invest in non-investment grade debt obligations rated by two of Standard & Poor's, Fitch and Moody's lower than CCC-, CCC- or Caa3, respectively, unless only one of those rating agencies rates the security, in which case that rating must be at least CCC- or Caa3, or in unrated securities determined to be of comparable quality by the Advisor. There are no minimum rating requirements for High Income Bond Fund (which means that the Fund may invest in bonds in default).
The "equity securities" in which certain Funds may invest include corporate debt obligations which are convertible into common stock. These convertible debt obligations may include non-investment grade obligations.
Yields on non-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 non-investment grade debt obligations. If the issuer of a security held by a Fund defaulted, the Fund might incur additional expenses to seek recovery.
In addition, the secondary trading market for non-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 non-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 non-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 non-investment grade debt obligations may be more dependent on the Advisor's own credit analysis than is the case with investment grade obligations.
BRADY BONDS
High Income Bond Fund and Total Return Bond Fund may invest in U.S.
dollar-denominated "Brady Bonds" as a non-principal investment strategy. These
foreign debt obligations, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to repayment of
principal at maturity by U.S. Treasury zero-coupon obligations that have the
same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized on a one-year or longer rolling-forward basis by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Brady Bonds can be viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity.
Those uncollateralized amounts constitute what is called the "residual risk."
If there is a default on collateralized Brady Bonds resulting in acceleration of the payment obligations of the issuer, the zero-coupon U.S. Treasury securities held as collateral for the payment of principal will not be distributed to investors, nor will those obligations be sold to distribute the proceeds. The collateral will be held by the collateral agent to the scheduled maturity of the defaulted Brady Bonds. The defaulted bonds will continue to remain outstanding, and the face amount of the collateral will equal the principal payments which would have then been due on the Brady Bonds in the normal course. Because of the residual risk of Brady Bonds and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds, Brady Bonds are considered speculative investments.
FIXED AND FLOATING RATE DEBT OBLIGATIONS
The debt obligations in which the Bond Funds invest as either a principal or non-principal investment strategy may have either fixed or floating rates. Floating rate securities are generally offered at an initial interest rate which is at or above prevailing market rates. The interest rate paid on these securities is then reset periodically (commonly every 90 days) to an increment over some predetermined interest rate index. Commonly utilized indices include the three-month Treasury bill rate, the 180-day Treasury bill rate, the one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or the longer-term rates on U.S. Treasury securities. Fixed rate 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 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.
PAYMENT-IN-KIND DEBENTURES AND DELAYED INTEREST SECURITIES
High Income Bond Fund and Total Return Bond Fund, as a non-principal investment strategy, may invest in debentures the interest on which may be paid in other securities rather than cash ("PIKs"). Typically, during a specified term prior to the debenture's maturity, the issuer of a PIK may provide for the option or the obligation to make interest
payments in debentures, common stock or other instruments (i.e., "in kind" rather than in cash). The type of instrument in which interest may or will be paid would be known by the Fund at the time of investment. While PIKs generate income for purposes of generally accepted accounting standards, they do not generate cash flow and thus could cause the Fund to be forced to liquidate securities at an inopportune time in order to distribute cash, as required by the Code.
Unlike PIKs, delayed interest securities do not pay interest for a specified period. Because values of securities of this type are subject to greater fluctuations than are the values of securities that distribute income regularly, they may be more speculative than such securities.
PREFERRED STOCK; CONVERTIBLE SECURITIES
The Bond Funds other than U.S. Government Mortgage Fund, Intermediate Government Bond Fund and Short Term Bond Fund, may invest in preferred stock as a non-principal investment strategy. Preferred stock, unlike common stock, offers a stated dividend rate payable from the issuer's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline.
All of the Bond Funds other than Intermediate Government Bond Fund, as a non-principal investment strategy, may invest in debt securities which are convertible into or exchangeable for, or which carry warrants or other rights to acquire, common or preferred stocks. Equity interests acquired through conversion, exchange or exercise of rights to acquire stock will be disposed of by the Bond Funds as soon as practicable in an orderly manner (except that the Bond Funds that may invest in preferred stocks directly are not required to dispose of any preferred stock so acquired).
TRUST PREFERRED SECURITIES
The Bond Funds other than Intermediate Government Bond Fund may invest in trust preferred securities as a non-principal investment strategy. Trust preferred securities are preferred securities typically issued by a special purpose trust subsidiary and backed by subordinated debt of that subsidiary's parent corporation. Trust preferred securities may have varying maturity dates, at times in excess of 30 years, or may have no specified maturity date with an onerous interest rate adjustment if not called on the first call date. Dividend payments of the trust preferred securities generally coincide with interest payments on the underlying subordinated debt. Trust preferred securities generally have a yield advantage over traditional preferred stocks, but unlike preferred stocks, distributions are treated as interest rather than dividends for federal income tax purposes and therefore, are not eligible for the dividends-received deduction. See "Taxation." Trust preferred securities are subject to unique risks, which include the fact that dividend payments will only be paid if interest payments on the underlying obligations are made, which interest payments are dependent on the financial condition of the parent corporation and may be deferred for up to 20 consecutive quarters. There is also the risk that the underlying obligations, and thus the trust preferred securities, may be prepaid after a stated call date or as a result of certain tax or regulatory events, resulting in a lower yield to maturity.
PARTICIPATION INTERESTS
High Income Bond Fund and Total Return Bond Fund, as a non-principal investment strategy, may acquire participation interests in senior, fully secured floating rate loans that are made primarily to U.S. companies. Each Fund's investments in participation interests are subject to its limitation on investments in illiquid securities. The Funds 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 Fitch or D by Standard & Poor's.
EXCHANGE TRADED FUNDS
The Funds other than Intermediate Government Bond Fund may invest in exchange traded funds ("ETFs") as a non-principal investment strategy. These are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track a particular market index. Each
Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs.
CLOSED-END INVESTMENT COMPANIES
The Tax Free Funds may invest up to 10% of their total assets in common or preferred shares of closed-end investment companies that invest in Fund-eligible investments. Shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. Shares acquired at a premium to their net asset value may be more likely to subsequently decline in price, resulting in a loss to the Fund and its shareholders. If a Fund acquires shares of closed-end investment companies, Fund shareholders would bear both their proportionate share of the expenses of the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies.
SPECIAL FACTORS AFFECTING SINGLE STATE TAX FREE FUNDS
As described in their Prospectuses, except during temporary defensive periods, each of Arizona Tax Free Fund, California Intermediate Tax Free Fund, California Tax Free Fund, Colorado Intermediate Tax Free Fund, Colorado Tax Free Fund, Minnesota Intermediate Tax Free Fund, Minnesota Tax Free Fund, Missouri Tax Free Fund, Nebraska Tax Free Fund, Ohio Tax Free Fund and Oregon Intermediate Tax Free Fund will invest primarily in municipal obligations issued by the state indicated by the particular Fund's name, and by the local and special-purpose political subdivisions of that state. Each such Fund, therefore, is susceptible to the political, economic and regulatory factors affecting issuers of the applicable state's municipal obligations. The following highlights only some of the more significant financial trends for each such state, and is based on information drawn from reports prepared by state budget officials, official statements and prospectuses relating to securities offerings of or on behalf of the respective state, its agencies, instrumentalities and political subdivisions, and other publicly available documents, as available on the date of this Statement of Additional Information. For each state, obligations of the local governments may be affected by budgetary pressures affecting the state and economic conditions in the state. The Funds have not independently verified any of the information contained in such official statements and other publicly available documents, but are not aware of any facts which would render such information inaccurate.
The economy and financial operations of each state are exposed to the risk of cyclical national recessions. In a recession, credit quality can drop if debt issuers do not maintain a balance between revenues and expenditures. The economy of any state is inextricably linked to the health of the U.S. national economy. Considerable risks remain for the national economy, including the threat of further U.S. involvement in wars abroad with Iraq and Korea. Additional threats of terrorism in the U.S. remain at the forefront of concern. Other risks include the implosion of the real estate market or confidence erosion on Wall Street due to accounting and other regulatory improprieties. These, and other national threats, may directly or indirectly influence the obligations of each state's local governments.
Arizona. Located in the country's Sunbelt, the State of Arizona has been, and is projected to continue to be, one of the fastest growing areas in the United States. Based on 2000 U.S. census figures, Arizona ranks 20th in U.S. population. Important to the State's development is the diversity of its economic growth. As growth in the mining and agricultural employment sectors has diminished over the last 25 years, significant job growth has occurred in the areas of aerospace and high technology, construction, finance, insurance and real estate. Arizona's strong reliance on the electronics manufacturing industry exposes it to dependence on the pace of business investment in information technology products and services. High-tech industries include electronics, instruments, aircraft, space vehicles and communications. The Phoenix area has a large presence of electronics and semiconductor manufacturers. Tucson, sometimes referred to as Optics Valley for its strong cluster of entrepreneurial optics companies, also has a concentration in aerospace. In addition, the State's dependence on the hospitality and construction industries exposes its economy to shocks in consumer confidence.
The State is divided into 15 counties. Two of these counties, Maricopa County and Pima County, are more urban in nature and account for approximately 75 percent of total population and 80 percent of total wage and salary employment in Arizona, based on 2000 estimates. Located within Maricopa County is the greater Phoenix metropolitan area, which consists of the city of Phoenix, the sixth largest city in the United States, and the surrounding cities of
Scottsdale, Tempe, Mesa, Glendale, Chandler, Peoria, Gilbert and Avondale. Located within Pima County is the Tucson metropolitan area, which is dominated by the city of Tucson, the State's second most populous city. Arizona's population is concentrated in the Phoenix area. Also, the statewide population tends to fluctuate seasonally. The State has a significant winter tourist and part-time resident population. These demographic factors affect the amounts of revenue generated to pay for Arizona bonds. It also limits the diversity of these bonds.
Arizona was hit hard in the last nation-wide recession that began in 2001, primarily because so many of the State's export industries -- those that bring money into the region from outside --are tied to business spending. Tourism, particularly in the urban areas, is heavily skewed to business travel. Manufacturing, which is heavily high tech, is also tied to business spending as a result of the massive levels of investment by firms in productivity tools. As of November 20, 2005, Arizona's economy continued its recent economic progress at a solid pace. While the unemployment rate edged down to 4.9 percent in October 2005, non-farm employment rose to 2.52 million, a 4.2 percent increase from a year ago. More than 100,000 jobs were added in 2004, with the private sector accounting for more than 95 percent of the increase. While manufacturing was flat, construction added almost 25,000 jobs since the end of 2004. In 2005, the fastest-growing industry in Arizona is construction, accounting for one out of every four new jobs in 2005. The forecasted rise in business spending on the national level should benefit Arizona significantly, as should any boost from a weaker dollar.
The biggest risk for the Arizona economy is that the U.S. economy will not grow as fast as expected. The State is also exposed to the same risks as the nation at large with respect the export picture. Like all states, Arizona is exposed to the repercussions of geopolitical shocks. Fortunately, a relatively high share of Arizona exports [head to] Asia, and that region is performing relatively well, economically. Further, many of Arizona's Asian exports are assembled into products that are imported into the U.S., where consumer demand is generally higher than most countries.
Budgetary pressures that affect State and economic conditions may also affect obligations of the State or local governments. On May 5, 2005 both the Arizona House and Senate passed a compromise budget plan of $8.2 billion. The enacted FY 2006 budget was based on total revenues of $8.25 billion. The FY 2006 budget assumes that both the national and Arizona economies will continue to grow, but at a more moderate level than the extraordinary growth rates seen in FY 2005. The budget is built on a revenue growth rate (excluding one-time financing sources) of 7.4 percent in FY 2006 compared to a forecasted FY 2005 growth rate of 13.3 percent. Adjusting for tax law and revenue changes as noted in the following sections, the FY 2006 growth rate is estimated to be 7.2 percent. Certain municipal securities of local Arizona governments may be obligations of issuers that rely on State aid, and future cuts in State spending and budgetary constraints may adversely affect local government by shifting additional monetary and administrative burdens onto local governments. There can be no assurance that any particular level of State aid to local governments will be maintained in future years.
Certain municipal securities may be obligations of issuers that rely in whole or in part on State revenues for payment of such obligations. Since most of the State's tax revenues come from volatile sources - sales and personal income taxes - the result is often fiscal stress during times of recession. In Arizona, on average, around 88 percent of General Fund revenue flow is made up of individual income tax and sales tax collections, with corporate income taxes accounting for less than 10 percent even in robust years. For the fiscal year ended June 30, 2005, revenues deposited into the State's general fund nearly reached $8 billion, an increase of 18.7 percent over the prior year. All three major tax sources recorded out-sized gains. Corporate income taxes, which comprise 8.6 percent of total revenues, rose by 42.1 percent. Individual income taxes (36.4 percent of the total) increased 28.9 percent. Sales and use taxes, the largest source at nearly 45 percent, rose by 11.1 percent. In December 2005, the Joint Legislative Budget Committee reported that general fund revenues for October 2005 were $32.1 million above forecasts, providing Arizona with a surplus of $237.8 million since the new fiscal year began July 1. However, October 2005 revenues were just 10.8 percent above October 2004, less than the 15 percent to 20 percent growth rates the State has enjoyed for the last few months, according to the budget committee's report released on November 30, 2005. The enacted budget requires any FY 2006 revenues above forecast to be deposited into the Budget Stabilization Fund. The first deposit will not be made until Joint Legislative Budget Committee Staff and the Governor's Office of Strategic Planning and Budgeting ("OSPB") report in February 2006 on revenues for the first six months of the fiscal year.
The State of Arizona does not issue general obligation bonds. As a result, Arizona municipal bonds are issued by local jurisdictions (cities, school districts) or are tied to specific municipal projects. This also means that bonds are
not always backed by statewide revenues. The State enters into certain lease transactions that are subject to annual review at its option. Local governmental units in the State are also authorized to incur indebtedness. The major source of financing for such local government indebtedness is an ad valorem property tax. In addition to financing public projects, local governments may also issue revenue bonds to be paid from the revenues of an enterprise or the proceeds of an excise tax, or from assessment bonds payable from special assessments. Arizona local governments have also financed public projects through leases that are subject to annual appropriation at the option of the local government.
In September of 2003, Moody's and Standard and Poor's placed Arizona on negative watch citing budgetary constraints and lack of financial flexibility as the reason. In February of 2004, Moody's reaffirmed Arizona's investment grade credit rating at "A1" but changed the outlook for the State from negative to stable. Moody's upgrade was based on several factors, including: (i) signs that the State's economy was improving, as gauged by key economic indicators; (ii) an improvement in Arizona's fiscal picture and an unexpected increase in revenue collections over the last two fiscal years' predictions; and (iii) adequate cash balances in the State's current and projected cash operating funds. These ratings reflect the State's credit quality only and do not indicate the creditworthiness of other tax-exempt securities in which the Fund may invest. As of March 2005, Moody's rated Arizona's lease obligations at "Aa3." As of December 2005, Standard and Poor's rated Arizona's lease obligations at "AA." The average credit rating among states in the U.S. for "full faith and credit" state debt is "Aa2" as determined by Moody's and "AA" as determined by Standard & Poor's.
In 1990 the State legislature enacted a formula-based Budget Stabilization Fund (a "Rainy Day" fund) into which deposits are required to be made during years of "above-trend" economic growth, for use in "below-trend" periods. Reductions in the Rainy Day fund may adversely affect future State budgets if such funds are needed to cover additional revenue shortfalls.
Local governments face additional risks and constraints that may limit their ability to raise money. Certain obligations held by the Arizona Tax Free Fund may be obligations of issuers that rely in whole or in part, directly or indirectly, on ad valorem property taxes as a source of revenue. Arizona law limits the taxing powers of Arizona local governments and districts. Arizona has two components of property taxes--primary and secondary. Primary property taxes can be collected by the State, counties, cities, community college or school districts and are dedicated for operation and maintenance expenditures of the respective jurisdiction. Secondary property taxes may be levied for voter-approved budget overrides, special districts, or to pay for bonded indebtedness.
Under the primary system, limitations have been enacted that restrict the ability to raise property taxes. Property value is the basis for determining primary property taxes of locally assessed real property and may increase by more than 10 percent per year only under certain circumstances. Under the secondary system, there is no limitation on annual increases in full cash value of any property. Additionally, under the primary system, annual tax levies are limited based on the nature of the property being taxed, and the nature of the taxing authority. Taxes levied for primary purposes on residential property only are limited to 1 percent of the full cash value of such property. In addition, taxes levied for primary purposes on all types of property by counties, cities, towns and community college districts are limited to a maximum increase of 2 percent over the prior year's levy, plus any amount directly attributable to new construction and annexation and involuntary tort judgments. The 2 percent limitation does not apply to taxes levied for primary purposes on behalf of local school districts. Annual tax levies for bonded indebtedness and special district assessments are unlimited under the secondary system. There are periodic attempts in the form of voter initiatives and legislative proposals to further limit the amount of annual increases in taxes that can be levied by the various taxing jurisdictions without voter approval. It is possible that if such a proposal were enacted, there would be an adverse impact on State or local government financing. It is not possible to predict whether any such proposals will be enacted in the future or what would be their possible impact on State or local government financing.
Provisions of the Arizona Constitution and State legislation limit increases in annual expenditures by counties, cities and towns and community college districts and school districts to an amount determined by the Arizona Economic Estimates Commission. This limitation is based on the entity's actual expenditures for fiscal year 1979-80, with this base adjusted annually to reflect changes in population, cost of living, and boundaries.
Budgetary pressures affecting the State and the ability of the State to raise revenue may affect obligations of the State or local governments. In November of 1992 a law was passed stating that any legislation that provides for a net increase in State revenues will be effective only on the affirmative vote of two-thirds of the members of each house
of the State legislature, and gubernatorial approval. If the Governor vetoes the measure, the legislation may not become effective unless it is approved by an affirmative vote of three-fourths of the members of each house. The constitutional amendment does not apply to the effects of inflation, increasing assessed valuation or any other similar effect that increases State revenue but which is not caused by an affirmative act of the legislature.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Arizona municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Arizona Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Arizona municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of Arizona municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Fund to pay interest on or principal of such obligations.
California. The economy of the State of California is the largest in the United States and one of the largest in the world. Although agriculture is gradually yielding to industry as the core of the State's economy, California leads the nation in the production of fruits and vegetables, including carrots, lettuce, onions, broccoli, tomatoes, and strawberries. Much of the State's industrial production depends on the processing of farm produce and upon such local resources as petroleum, natural gas, lumber, cement, and sand and gravel. Since World War II, however, manufacturing, notably of electronic equipment, computers, machinery, transportation equipment, and metal products, has increased enormously. These demographic factors affect the amounts of revenue generated to pay for California bonds.
The State's population of over 35 million has more doubled since 1960 and now constitutes about 12 percent of the U.S. total. Following the severe recession in the early 1990s, California began a period of strong growth in 1994 in virtually all sectors, particularly in high technology manufacturing and services, entertainment, tourism, and construction, and also with very strong growth in exports. In 2001, the State began showing the impact of the nationwide economic slowdown, coupled with a cyclical downturn in the high technology sector and entered a mild recession. International trade also slowed reflecting weakness in overseas economies (particularly in Asia). The terrorist attacks on September 11, 2001 resulted in a further, but mostly temporary, economic decline in tourism-based areas. Job losses were concentrated in the San Francisco Bay Area, particularly in high technology industries; while economic conditions were better in other parts of the State.
Statistics released since January 2005 show that the California economy significantly improved in 2004. As recently as the second half of 2003, personal income was growing at a 4.1 percent year-over-year pace. By the second half of 2004, however, the pace had accelerated to 6.3 percent. California's personal income growth has outstripped the nation's since the fourth quarter of 2003.
Made-in-California exports began to expand substantially in 2004, reaching their highest level since 2000. Building on solid growth in the final months of 2003, exports surged by 17 percent during 2004. High-tech exports expanded by more than 15 percent, and exports of both non-electrical machinery and transportation equipment grew by more than 30 percent. State exports expanded to all major markets, led by sharp gains in shipments to Mexico, Japan, China, South Korea, Taiwan, Canada, Singapore, and the United Kingdom. California deliveries to China grew by over 25 percent in 2004, the fastest pace among the State's major trading partners. California's residential real estate markets made impressive gains in 2004, but cooled somewhat during the first quarter of 2005. Buoyed by job market gains, improved personal income gains, and low mortgage rates, home sales were robust throughout 2004, and the median single-family home price appreciated by over 21 percent from 2003. While real estate markets remained vigorous in early 2005, sales and price gains are not likely to be as big in 2005 as in 2004. During the first three months of 2005, both the inventory of homes for sale and the time it took to sell a home rose substantially from a year earlier.
As the economy pulled out of recession, a much-welcomed development in 2004 was the renewal of employment growth. Over 250,000 new nonfarm payroll jobs were created during 2004, the first good gain since 2000. The average level of nonfarm payroll employment was 147,000 higher in 2004 than in 2003. From October 2004 to October 2005, nonfarm payroll employment grew by 1.3 percent, as compared to 1.4 percent in the nation.
In the first quarter of 2005, total housing permits granted were down slightly from a year earlier. But existing home sales remained brisk, and the value of nonresidential permits increased. Residential building permit issuances averaged 213,000 units during the first ten months of 2005, a 2.4 percent improvement on the same months of 2004. The State's tourism industry continues to improve, as evidenced by increased airport passenger counts and higher hotel/ motel occupancy rates.
At the midpoint of 2005, California was enjoying a well-balanced economic expansion. Sustained job and wage growth coupled with robust business profits were supporting a healthy real estate market as well as expanding home and business construction activity. California also passed a notable milestone in May 2005 - total industry employment surpassed the previous peak employment level reached just before the 2001 recession. Economic reports from October 2005 indicate that while the California economy is improved from a year ago, recent evidence points to moderating growth.
California's economy continued to generate new jobs through the third quarter of 2005, and the State's unemployment rate continued to fall. In October 2005, California posted an unemployment rate of 5.2 percent, up slightly from 5.1 percent in September, but down significantly from 6.0 percent in October 2004. In comparison, the national unemployment rate for the same periods was 5.0 percent, 5.1 percent, and 5.5 percent, respectively. In October 2005, the State posted total employment (seasonally adjusted) of over 17 million, a slight improvement over September 2005, and a gain of nearly 500,000 jobs since October 2004.
The California Department of Finance projects that, on an annual average basis, job growth will improve to 1.7 percent in California in 2005 and 2006. Unemployment is not expected to change much during the rest of 2005 and in 2006. Growth in total State personal income will dip slightly in 2005 before edging up in 2006. Housing permits will trend downward.
In early 2005, Governor Schwarzenegger proposed his budget for the 2005-06 fiscal year. The Governor noted that, in the absence of corrective actions to slow spending growth and other policy changes, the State would spend $92.6 billion in General Fund monies in fiscal year 2005-06, with only $84.2 billion in resources estimated to be available. Taking into account the need to provide for a reserve of $500 million and to fund other adjustments totaling $170 million, the Governor projected a budget gap of $9.1 billion. This projected gap was due to: (a) an operating deficit in 2004-05 of $1.7 billion, (b) a gap between the growth in baseline expenditures and revenues of $5.2 billion, (c) the loss of $2 billion of Economic Recovery Bonds that were used to help fill the gap in 2004-05, and (d) $170 million for other adjustments.
The changes proposed by the Governor to close the gap consisted mostly of reductions in the rate of increase of spending, totaling $7 billion. The Governor's budget also proposed to close the gap by (a) using $1.7 billion of the Economic Recovery Bonds (authorized by the California taxpayers in Proposition 57), which was about $300 million less borrowing than was included in the Budget Act of 2004 and (b) a variety of proposals to increase revenues by a total of $409 million without tax increases.
In May 2005, the Governor released a budget which acknowledged improved economic conditions and forecasts in the intervening months since he submitted his original budget. However, because national economic trends pointed toward a slowing of the recovery after 2006, and because of the difficulty in predicting economic trends, the Governor choose to treat the largest portion of the new revenue predicted since January 2005 as one-time rather than permanent.
The Governor's revised budget included no new borrowing and no further borrowings from the Economic Recovery Bonds, leaving more room for those bonds should difficulties arise in future years. The revised budget also allowed for the State to make a substantial boost in rebuilding its infrastructure by allowing all the money in the Proposition 42 account to go to its intended purpose (Proposition 42 requires revenues from certain state sales and use taxes to be used only for certain transportation purposes, except that by a vote of two-thirds the Legislature may suspend or modify the percentage allocation of revenues).
The effects of California's strong economy can be seen clearly in the actual General Fund revenues received by the State through October 2005. In October 2005, California received actual General Fund revenues of $5.542 billion,
which was $478 million above forecast. For the 2005-06 budget year-to-date (through October 2005), California received actual General Fund revenues of $26.23 billion, which was $1.70 billion (nearly 7 percent) over forecast.
In the future, local governments could potentially face large costs associated with the burden of administering new programs if responsibility for these programs is transferred from the State to the local governments. In addition, local governments in California could suffer fiscally if the State government halts payments to local governments. For example, when vehicle license fees, which go to local governments, were recently lowered, the State contributed the amount of money lost so local governments would not lose needed income. The Governor's May 2005 revised budget, by way of example, included pay-back of 50 percent of the Vehicle License Fee Gap due to local governments. Local governments could suffer financially if the State government were to halt such payments. In addition, local governments may face other reductions in State fiscal aid for various programs.
The average credit rating among states in the U.S. for "full faith and credit" state debt is "Aa2" as determined by Moody's and "AA" as determined by Standard & Poor's. Prior to 1991, the State's general obligation bonds had enjoyed the highest rating by either Moody's or Standard & Poor's. However, California's credit quality declined after the onset of the national recession in 1990. By the end of December 2003, the State's rating with Standard & Poor's had dropped to "BBB", and its rating with Moody's had dropped to "Baa1," just three steps above "junk," the level at which many institutional investors do not invest in the securities.
Since the end of 2003, California's general obligation bond ratings improved only slightly. In May 2004, Moody's upgraded the State's rating to "A3," and the State was assigned a positive rating outlook. Moody's announcement was the first ratings upgrade for California in nearly four years. In August 2004, Fitch removed California from its Rating Watch Negative list, and that same month Standard & Poor's raised California's rating to "A." As of August 2005, California was rated "A2" by Moody's, "A" by Standard and Poor's, and "A" by Fitch.
Despite the upgrades, the State's general obligation bond ratings remain well below average for U.S. states and remain among the lowest of all of the U.S. states due to State its ongoing fiscal challenges. Should the financial condition of California deteriorate, its credit ratings could be reduced, and the market value and marketability of all outstanding notes and bonds issued by California, its public authorities or local governments could be adversely affected.
In addition to California's credit quality, there are a number of additional risks to investing in California municipal securities. Certain municipal securities may be obligations of issuers that rely in whole or in part on State revenues for payment of such obligations. Such revenues may be affected by limitations imposed on new taxes or tax increases. In 1978, State voters approved an amendment to the State Constitution known as Proposition 13. The amendment limits ad valorem taxes on real property and restricts the ability of taxing entities to increase real property tax revenues. State legislation was adopted that provided for the reallocation of property taxes and other revenues to local public agencies, increased State aid to such agencies, and provided for the assumption by the State of certain obligations previously paid out of local funds. More recent legislation has reduced State assistance payments to local governments. There can be no assurance that any particular level of State aid to local governments will be maintained in future years.
To close certain loopholes in previously passed Propositions, California voters approved Proposition 218. The initiative applied the provisions of Proposition 62 to all entities, including charter cities. It requires that all taxes for general purposes obtain a simple majority popular vote and that taxes for special purposes obtain a two-thirds majority vote. Prior to the effectiveness of Proposition 218, charter cities could levy certain taxes such as transient occupancy taxes and utility user's taxes without a popular vote. Proposition 218 limits the authority of local governments to impose property-related assessments, fees and charges, requiring that such assessments be limited to the special benefit conferred and prohibiting their use for general governmental services. Proposition 218 also allows voters to use their initiative power to reduce or repeal previously authorized taxes, assessments, fees and charges. Due to limitations like Propositions 13, 62 and 218, obligations of the State or local governments may be affected by the ability of the State to raise revenue.
Another risk, which results from Article 13(A) of the California Constitution, concerns the security provisions for debt repayment. Since 1986, general obligation debt issued by local governments has required voter approval by a two-thirds majority. As a result, much of tax-backed debt now issued by California local governments is not general
obligation debt, does not have "full faith and credit" backing, and has higher credit risk and more limited bondholder rights.
Some risks in California apply more to local issuers than to state government. In areas of very rapid population growth, the costs of building public infrastructure are very high, large amounts of municipal bonds are being sold, and debt burden is increasing. In some parts of California, there is also a fear that population growth may possibly limit future economic growth due to transportation and air pollution problems.
Some local governments in California have experienced notable financial difficulties, and there is no assurance that any California issuer will make full or timely payments of principal or interest or remain solvent. For example, in December 1994, Orange County, California, together with its pooled investment funds, which included investment funds from other governments, filed for bankruptcy. Orange County has since emerged from bankruptcy. Los Angeles County, the nation's largest county, in the recent past has also experienced financial difficulty and its financial condition will continue to be affected by the large number of county residents who are dependent on government services and a structural deficit in its health department.
California has been burdened with unexpected repercussions from electricity market deregulation and adverse developments in the electric utilities industry. These include imbalances between supply and demand, unexpectedly high and volatile generating costs, decreased system reliability, increased competitive pressures, deterioration in the financial condition and credit quality of electric utilities, and the effects of changing environmental, safety, licensing and other requirements. Widely publicized difficulties in California's energy supplies had been seen in early 2001 to pose some risks to the economy, but during the summers of 2001 and 2002 there were no electricity blackouts or shortages of natural gas. Energy difficulties are mitigated by the fact that California's economy is very energy-efficient. U.S. Department of Energy statistics for 1999 revealed that California ranked 50th of the 50 states in energy expenditures as a percentage of State domestic product. Additional risks exist and others may develop in the future. The timing and success of any market, regulatory, legislative, or other solution to these problems is uncertain.
Finally, California is subject to unique natural hazard risks. Earthquakes can cause localized economic harm that could limit the ability of governments to repay debt. Cycles of drought and flooding are also concerns insofar as they affect agricultural production, power generation, and the supply of drinking water. One of the State's most acute problems is its need for water. Wells and underground aquifers are drying up in San Diego County and Southern California because of five years of drought, an occurrence that has had little effect upon current water supplies, but which could eventually put added strain on the region's scarcest, shrinking, resource. Cutbacks in federally funded water projects in the 1970s and 80s led many California cities to begin buying water from areas with a surplus, but political problems associated with water sharing continue.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of California municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the California Intermediate Tax Free Fund and California Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of California municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Funds are unable to predict whether or to what extent such factors or other factors may affect the issuers of California municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Funds to pay interest on or principal of such obligations.
Colorado. The State of Colorado is the most populous state in the Rocky Mountain region. The State has two distinctive geographic and economic areas. The eastern half of the State consists of the eastern plains, which are flat, open and largely devoted to farming, and the Front Range, which contains the major metropolises. The State's population and wealth are concentrated in the Front Range, principally in four major metropolitan areas: Denver/Boulder, Colorado Springs, Fort Collins/Greeley and Pueblo. These demographic factors affect the amounts of revenue generated to pay for Colorado bonds. They may also limit the diversity of these bonds.
Denver, the State capital and the largest city in Colorado, is the major economic center in the State and the Rocky Mountain region, having developed as a regional center for transportation, communication, finance and banking. More recently, the Front Range has attracted advanced-technology industries. The State's economy is sensitive to the
national economy, leading to economic performance that depends a great deal on economic performance at the national level. The State economy and State financial operations are exposed to the risk of cyclical national recessions. In a recession, credit quality can drop if debt issuers do not maintain a balance between revenues and expenditures.
Colorado was arguably among the hardest hit during the last national recession, primarily because of the region's higher employment concentration in the areas of technology, telecommunications, travel, and tourism. Employment conditions deteriorated more than the national average resulting in slower personal income growth. Homebuilding and commercial construction softened amid weakening demand and rising office vacancies. Residential home building rebounded in 2004 and the trend of increasing unemployment reversed in 2004. As of December 2005 Colorado's economy was on the verge of returning to its pre-recession level of 2.25 million jobs. According to an economic forecast released December 5, 2005, Colorado's economy will continue its slow recovery with a 2.3 percent increase in jobs in 2006, enough to regain a key employment level first achieved four years ago. The October 2005 seasonally adjusted unemployment rate in Colorado was 4.9 percent. This compares with a 5.2 percent revised unemployment rate in September 2005 and 5.4 percent in October 2004. As the national economy rebounds, the State economy is expected to follow.
Although Colorado has no outstanding general obligation debt, Standard & Poor's rates Colorado lease obligations AA as of November 29, 2005. Moody's and Fitch have no ratings for Colorado obligations. These ratings reflect the State's credit quality only and do not indicate the creditworthiness of other tax-exempt securities in which the Funds may invest.
The State's budget process begins in June of each year when State departments prepare both operating and capital budgets for the fiscal year beginning 13 months later. In August, these budgets are submitted to the Office of State Planning and Budgeting ("OSPB") for review and analysis. The OSPB advises the governor on departmental budget requests and overall budgetary status. Budget decisions are made by the governor following consultation with affected departments and the OSPB. The State Constitution requires that expenditures for any fiscal year not exceed revenues for such fiscal year.
Certain municipal securities may be obligations of issuers that rely in whole or in part on State revenues for payment of such obligations. The largest source of the State's General Fund revenues is receipts generated by the individual income tax. Since most of Colorado's tax revenues come from volatile sources - sales and personal income taxes - the result is often fiscal stress during times of recession.
Like many states, the State of Colorado faced budgetary constraints as a result of the recession that started in the spring of 2001 and the events of September 11, 2001. Over the last few years, however, the State's financial situation has improved. Colorado managed to close an $809 million gap in 2003 with spending reductions and revenue enhancement measures. In fiscal year 2002-03, the State's General Fund ended the year with a $224.9 million reserve, and a $346.9 million reserve in fiscal year 2003-04. In FY 2004-05, the State's General Fund ended the year with a $331.4 million reserve. This reserve exceeded the statutory four percent reserve by $94 million.
In June 2005, the OSPB released its budget forecast, noting that General Fund revenues are forecast to increase 5.8 percent in FY 2004-05 and 4.5 percent in FY 2005-06. The OSPB also forecasted that Cash Fund revenues would increase 11.2 percent in FY 2004-05 and decrease 3.4 percent in FY 2005-06. In September 2005, the OSPB revised its forecast to state that gross General Fund revenues would increase 4.6 percent in FY 2005-06 and 5.9 percent in FY 2006-07 and further that Cash Fund revenues would increase 4.4 percent in FY 2005-06 and decrease 3.7 percent in FY 2006-07. The September 2005 OSPB forecast for FY 2005-06 General Fund revenues is $74.3 million higher than the June 2005 OSPB forecast and the forecast for General Fund revenues in FY 2006-07 is $10.4 million higher. The FY 2005-06 increase is due to the strengthening Colorado economy and growing personal income. The OSPB's September 2005 forecast assumed that the State's job market and economy would continue to recover. Through September 2005, FY 2005-06 individual income tax receipts are up 6.2 percent, while excise taxes were up 5.1 percent. Year-to-date tax revenue for October 2005 was $2,203.4 million, which was 1.3 percent under the current estimate and 0.2 percent under the June 20, 2005 estimate.
The adoption by voters of revenue and expenditure limitations poses additional risks in Colorado. In Colorado, unlike many states, only voters can approve tax increases, making it harder to increase State and local revenues. The Taxpayers Bill of Rights ("TABOR") is one limitation, which applies to all levels of State and local government.
TABOR limits increases in State revenue collections from one year to the next to the rate of inflation rate plus the percentage of population growth and requires voter approval of tax increases. Voter approval is also required for any new taxes or to increase current taxes. Any surpluses the State collects must be returned to taxpayers. There is no provision in TABOR to account for cyclical revenue swings. After logging TABOR revenue surpluses for five years, the TABOR surplus disappeared in fiscal year 2001-02 and remained absent through fiscal year 2003-04. Indeed, fiscal year 2002-03 TABOR revenues were lower than the TABOR limit by $584.3 million. In FY 2004-05, the TABOR surplus reappeared after a four-year absence, totaling $44.7 million.
Two measures passed by voters in the November 2000 election lowered the TABOR surplus each year by at least $250 million. Amendment 23, which provides increased public school funding, and Referendum A, which is also known as the Senior Homestead Exemption and provides property tax relief for senior citizens, both exempt revenues from the TABOR restriction.
On November 1, 2005, Colorado voters approved statewide measure Referendum C, which permits the State to keep and spend revenues above normal TABOR limits for five years. Some $440 million of the revenue made available by Referendum C can be used in the fiscal year ending June 30, 2006. These results mean that the State will be allowed to retain all of the revenue that it receives over the next 5 years. It also means that the Constitutional TABOR revenue will, beginning in the sixth year, be the amount of actual revenue received by the State in the highest of the 5 years. After that, the allowable revenue formula will once again be population change plus CPI, regardless of actual revenue collections. In effect, this removes TABOR's ratchet from the State Constitution. Over the next five years, money that would have been refunded to taxpayers will be dedicated to health care, education, and transportation. It should be noted that Colorado's General Fund is still subject to the six percent spending increase limit contained in the Arveschoug-Bird bill. Arveschoug-Bird limits state General Fund appropriations to an annual increase of six percent over the prior year or, in total, five percent of state personal income. General Fund revenue received over this amount is transferred to nonoperating funds for capital construction and highways. The Joint Budget Committee and the General Assembly will have to continue to treat the six percent spending limit as a floor as well as a ceiling, because any appropriation below a 6 percent growth rate becomes the basis for the next year.
The State has accumulated very limited emergency reserve funds and it does not currently have a device in place, such as a "Rainy Day" fund, to smooth government revenues and expenditures over the business cycle. Colorado operates under two separate reserve requirements that obligate the State to set aside moneys. First, the statutory reserve requires that four percent of General Fund appropriations be set aside for revenue shortfalls. If at any time during the year revenue projections indicate that there would not be sufficient General Fund revenues to maintain at least half of the required four percent (i.e., two percent), the Governor must take steps to reduce or restrict spending. Secondly, Article XX of the Colorado Constitution, enacted by popular vote in response to the 1992 TABOR initiative, includes a requirement for an "emergency reserve fund" of three percent of the annual budget. This emergency reserve fund is specifically forbidden for use in economic emergencies. It can only be used in the case of a natural disaster like a flood or tornado, and all dollars used must be repaid by the close of the fiscal year.
Issuers of municipal securities that rely on revenue sources, such as property taxes, may encounter financial constraints that impact the obligations of these issuers. Recently, many of the State's resort-related commercial real estate has converted to residential property in the form of timeshares. Under the State constitution, commercial properties are taxed at a higher rate than are residential parcels. As more commercial real estate converts into residential real estate, there may be less tax income from property tax to fund local governments. Under the Gallagher Amendment to the Colorado Constitution enacted in 1982 the State's total residential assessed value cannot make up more than 45 percent of the overall assessed value of property in the State. That means as home values rise, or new homes are constructed, the 45 percent cap forces residential real estate to be assessed at an ever-decreasing rate.
The State's tourism industry rebounded during 2003 after suffering through the previous year's drought and wildfires. In August 2005, approximately 4.1 million people traveled through Denver International Airport, setting a new record as the third busiest month in the airport's history. The 2.8 percent increase brought the total year-to-date passenger total to 29.5 million. If there is another U.S. terrorist attack, Colorado's tourism industry could be hurt as visitors fearful of traveling stay home.
Finally, Colorado is subject to unique natural hazard risks. One unpredictable factor is the weather. If there is good snow for the upcoming ski season the profits of ski resorts and the tourism industry as a whole could likely
benefit. The State's mountain resorts reported an increase in the number of visits during the 2004-2005 ski season. Skier visits totaled 11.8 million, increasing nearly 5 percent compared with 11.3 million visits reported during the 2003-2004 season.
Ample snow would also likely mean fuller reservoirs and could potentially reduce the chance of future severe droughts like the one recently experienced. Cycles of drought and flooding are concerns insofar as they affect agricultural production, power generation, and the supply of drinking water. According to snowpack measurements released in December 2005, the statewide snowpack was only 84 percent of the 30-year average. Winter snowpack is vital in Colorado, providing more than 80 percent of the water residents, farms and industries use year round. The southwestern part of the State, which was hit hardest by the severe Colorado drought that began in 2000, is in the worst shape again in 2005. Snowpack in the Upper Rio Grande basin was 23 percent of average as of December 2005.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Colorado municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Colorado Intermediate Tax Free Fund and Colorado Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Colorado municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Funds are unable to predict whether or to what extent such factors or other factors may affect the issuers of Colorado municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Funds to pay interest on or principal of such obligations.
Minnesota. Minnesota's constitutionally prescribed fiscal period is a biennium, and Minnesota operates on a biennial budget basis. Legislative appropriations for each biennium are prepared and adopted during the final legislative session of the immediately preceding biennium. Prior to each fiscal year of a biennium, Minnesota's Department of Finance allots a portion of the applicable biennial appropriation to each agency or other entity for which an appropriation has been made. An agency or other entity may not expend moneys in excess of its allotment. If revenues are insufficient to balance total available resources and expenditures, Minnesota's commissioner of finance, with the approval of the governor, is required to reduce allotments to the extent necessary to balance expenditures and forecasted available resources for the then current biennium. The governor may prefer legislative action when a large reduction in expenditures appears necessary, and if Minnesota's legislature is not in session the governor is empowered to convene a special session.
Diversity and a significant natural resource base are two important characteristics of the Minnesota economy. Generally, the structure of the State's economy parallels the structure of the United States economy as a whole. There are, however, employment concentrations in the manufacturing categories of fabricated metals, machinery, computers and electronics, food, and printing and related areas. The State's unemployment rate continues to be substantially less than the national unemployment rate. Since 1980, Minnesota per capita income generally has remained above the national average. In 2004, Minnesota per capita personal income was 108.9 percent of its U.S. counterpart. Payroll employment growth in Minnesota, however, has been weaker than the national average since the beginning of the recession in 2001.
The State relies heavily on a progressive individual income tax and a retail sales tax for revenue, which results in a fiscal system that is sensitive to economic conditions. During the first half of 2003, the State addressed substantial projected budget deficits by substantially reducing projected spending, including aid to local government and higher education, transferring funds from other accounts, deferring certain expenditures and transfers, in some cases by borrowing funds, deferring certain sales tax refunds, and raising fees. On February 27, 2004, the Minnesota Department of Finance released an Economic Forecast projecting, under then current laws, a general fund deficit of $160 million for the biennium ending June 30, 2005. A forecasted deficit is not automatically reduced by the budget reserve, because gubernatorial or legislative action is required to access the reserve. Minnesota's Constitution prohibits borrowing for operating purposes beyond the end of a biennium, but the commissioner of finance, with the approval of the governor, has statutory authority in the event of a projected deficit to release reserve funds and reduce unexpended allotments of prior transfers and appropriations. The State legislature adjourned its 2004 regular session without substantially reducing the projected deficit, but the Governor exercised his statutory powers to eliminate the projected deficit, primarily through reductions in spending. On February 28, 2005, the Department of Finance released an updated Economic Forecast projecting, under then current laws, a general fund balance of $175 million for the biennium ending
June 30, 2005, but, after reflecting legislatively mandated allocations of this surplus to restoring the State's budget reserve to $653 million and reversing some shifts in the timing of school aid payments, the projected balance was reduced to zero. The Department also forecast a $466 million General Fund shortfall for the biennium ending June 30, 2007, after allowing for a $350 million cash flow account and a $653 million budget reserve, based on projected expenditures of $30.2 billion. The State enacted legislation to eliminate the shortfall, largely relying on a new cigarette fee and a variety of tax increases.
On November 30, 2005, the Department of Finance released an updated Economic Forecast projecting, under then current laws, a general fund balance of $701 million for the biennium ending June 30, 2007, after allowing for a $350 million cash flow account, a $653 million budget reserve, and a $317 million tax relief account, all as provided by law, based on projected expenditures for the biennium of $30.65 billion. Current law, however, requires the $701 million balance to be used to reverse certain shifts between biennia in the timing of payments to school districts, resulting in an adjusted projected General Fund balance at June 30, 2007 of zero, after allowing for the cash flow account, budget reserve and tax relief account, and projected expenditures for the biennium of $31.35 billion. Following the release of the November 2005 Economic Forecast, a Minnesota district court invalidated the State's new health impact fee on tobacco products. The State plans to appeal this decision, but if the decision is upheld the adverse effect on the State's General Fund could be as much as $401 million for the current biennium. The Minnesota Council of Economic Advisors has, for some time, urged the State to increase its budget reserve substantially to 5 percent of biennial spending.
The State is a 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 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, so State budgetary difficulties may have substantial adverse effects on such local government units. Generally, the State has no obligation to make payments on local obligations in the event of a default. Accordingly, factors in addition to the State's financial and economic condition will affect the creditworthiness of Minnesota tax-exempt obligations that are not backed by the full faith and credit of the State. Even with respect to revenue obligations, no assurance can be given that economic or other fiscal difficulties and the resultant impact on State and local government finances will not adversely affect the ability of the respective obligors to make timely payment of the principal of and interest on Minnesota tax-exempt obligations that are held by the Fund or the value or marketability of such obligations.
Certain Minnesota tax legislation (see "Tax Matters - Minnesota Tax Matters") and possible future changes in federal and State income tax laws, including rate reductions, could adversely affect the value and marketability of Minnesota municipal bonds held by the Fund.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Minnesota municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Funds are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Minnesota municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Funds are unable to predict whether or to what extent such factors or other factors may affect the issuers of Minnesota municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Funds to pay interest on or principal of such obligations.
Missouri. Missouri's economic base is diversified and its economic profile generally resembles that of the nation. Like the national economy, most recent economic indicators show that Missouri's economy is strong and growing. From January 2005 to October 2005, Missouri added more than 33,000 new jobs. This figure actually reflects a slight decrease in employment during the third quarter of 2005. Through June 2005, Missouri's total nonfarm
employment had increased by 39,700, or 1.5 percent, for the year. Only six states experienced more rapid payroll employment than Missouri during the first half of 2005.
Missouri's unemployment rate has improved consistent with the job growth seen during the first part of 2005. After peaking at 6 percent in January 2005, Missouri's seasonally adjusted unemployment rate fell to 5 percent in October 2005, equal to the national unemployment rate. Missouri's October 2005 unemployment rate was significantly lower than the rate for the same month in 2004 and was among the lowest unemployment rates in Missouri since 2001.
Improvement in the manufacturing sector continues to contribute to Missouri's economic recovery notwithstanding general declines in manufacturing nationwide. Manufacturing jobs make up about 11 percent of Missouri employment. Since Missouri's relatively modest manufacturing job losses in 2003, manufacturing trends continue to outpace the country. Missouri added 4,500 manufacturing jobs during the period between November 2003 and November 2004 and added more than 5,000 manufacturing jobs during the first half of 2005. Because Missouri and certain municipalities have large exposure to manufacturing, trends in these industries, over the long term, may impact the demographic and financial position of Missouri and its municipalities.
Defense-related businesses play an important role in Missouri's economy. In addition to the large number of civilians employed at the various military installations and training bases in the State, aircraft production and defense-related businesses receive sizable annual defense contract awards, and thus Missouri is vulnerable to possible cutbacks in defense spending. Over the past decade, Missouri has consistently ranked among the top eight states in total military contract awards. Agriculture is also important to the Missouri economy. The State consistently ranks high in the amount of cash it receives from farm crops, livestock and products. Because of this, Missouri is subject to unique natural hazard risks. Cycles of drought and flooding are concerns insofar as they affect agricultural production, in addition to affecting drinking water and power supplies.
Missouri's budget is approved on an annual basis. The budget for fiscal year 2006 began July 2005. The State's budget summary for fiscal year 2006 notes that initial fiscal year 2006 revenue estimates projected net revenue growth of 2.9 percent for the year. Revenue for fiscal year 2006 was expected to be depressed due to the completed phase-out of the estate tax and the implementation of a 2004 transportation ballot initiative known as Constitutional Amendment No. 3, which limits the amount of highway funds that may be received by the Department of Revenue. The estate tax phase-out and Constitutional Amendment No. 3 were expected to lower revenue collections by $33 million and $30.4 million, respectively. In addition, Constitutional Amendment No. 3 was expected to result in an additional $31.7 million in costs that must be borne by the general revenue fund.
Actual general revenue collections for the fiscal year to-date have been ahead of projections and significantly in excess of the prior year's revenue. From July 2005 through October 2005, Missouri collected $2.2 billion in revenue compared with $2.1 billion during the same period the year before, representing an increase of 6.4 percent. October 2005 net general revenue collections compared to October 2004 collections increased by 12.5 percent, from $444 million last October to $499 million this October.
Fixing any potential State revenue shortfalls may be complicated by the fact that the State constitution prohibits raising taxes beyond a certain point without voter approval. The adoption by voters of revenue and expenditure limitations, like Missouri's Hancock Amendment, a measure that limits the growth of State-government income, has placed many local governments under a degree of fiscal stress. The amendment, which was approved by voters in 1980, generally restricts the growth of State income to the rate of growth of personal income in Missouri. It also requires that voters must approve most government tax or fee increases. Since 1995, about $1 billion in State income has been returned to Missouri taxpayers because the State's tax collections breached the Hancock ceiling.
In November 2000, the voters of Missouri approved the creation of a Budget Reserve Fund (commonly called the "Rainy Day" fund) by combining the State's Cash Operating Reserve Fund and the Budget Stabilization Fund. The fund is required to have 7.5 percent of the previous year's net general revenue collections. Reductions in the Rainy Day fund may adversely affect future State budgets if such funds are needed to cover additional revenue shortfalls.
Local governments face additional constraints that may limit their ability to raise money. These constraints may impact the municipal obligations of these issuers. In Missouri, the property tax has traditionally been the largest source of revenue for local governments in general. Property taxes are taxes on the value of real property (such as land
and buildings) owned by a resident or business in the community and are paid on an annual basis. For counties, property tax revenues are 40 percent of total revenues, and for municipalities, 17 percent. In Missouri, tax levies were reduced following reassessment pursuant to Article X Section 22 of the Constitution of Missouri adopted by the voters in 1980 to ensure that taxing jurisdictions would not reap windfalls as a result of biennial reassessments. Thus, revenues generated after implementation of reassessment did not increase appreciably from revenues received prior to the statewide reassessment program.
There are also limitations on State and local debt issuance that may affect the ability to generate revenue on a State and local level. Limitations on the State debt and bond issues are contained in Article III, Section 37 of the Constitution of Missouri. The General Assembly, or the people by initiative, may submit the proposition to incur indebtedness to voters of the State, and the bonds may be issued if approved by a majority of those voting. Locally, under Article V of the Missouri Constitution, no county, city, incorporated town or village, school district or other political corporation or subdivision of the State is allowed to incur debt beyond the income and revenue provided for such year plus any unencumbered balances from previous years.
Missouri has a Constitutional Amendment from 1980 that limits revenue to the ratio of fiscal year 1980-81 State revenue to calendar year 1979 State personal income (5.64 percent) multiplied by the greater of State personal income in the previous calendar year or the average State personal income over the previous three calendar years. No assurances can be given that the amount of revenue derived from taxes will remain at its current level or that the amount of State grants to local governments will continue. Future spending cuts and budgetary constraints may adversely affect local government by placing shifting additional monetary and administrative burdens onto local governments.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Missouri municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Missouri Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Missouri municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of Missouri municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Fund to pay interest on or principal of such obligations.
Nebraska. Agriculture is Nebraska's dominant occupational pursuit. The State's chief agricultural products are cattle, corn, hogs, soybeans, and wheat. As the dollar depreciates against other foreign currencies, U.S. exports are promoted. Nebraska's agriculture sector has a large dependency on international markets. If the U.S. dollar falls too quickly, this could harm Nebraska's trading partners, weakening their economies and lowering their demand for Nebraska products. A controlled lowering of the U.S. dollar is most beneficial to the Nebraska economy.
Because of the importance of agriculture, Nebraska is also subject to unique natural hazard risks. Cycles of drought and flooding are concerns insofar as they affect agricultural production, power generation, and the supply of drinking water. Much of the State remains categorized as being in drought moderate or severe. In November 2005, the U.S. Department of Agriculture agreed to designate thirteen Nebraska counties as disaster areas due to the ongoing drought and other damaging weather events. The drought leads to less sales tax revenue, less income tax, fewer sales at retailers in rural Nebraska and other potential negative effects on local municipal government.
Nebraska's largest industry is food processing, which derives much of its raw materials from local farms. The State has diversified its industries since World War II, and the manufacture of electrical machinery, primary metals, and transportation equipment, is also important. Mineral deposits of oil (discovered in Cheyenne County in 1949-50), sand and gravel, and stone contribute to the State's economy. Preliminary numbers from the state Department of Labor show Nebraska's total employment (not seasonally adjusted) at 950,835 for October 2005, an increase of over 22,000 from January 2005. Nebraska's annual average unemployment rate has been among the lowest in the nation for the last decade. Preliminary numbers from the U.S. Department of Labor show the Nebraska seasonally adjusted unemployment rate at 3.7 percent for October 2005. In comparison, the seasonally adjusted national rate in October 2005 was 5 percent.
Certain municipal securities may be obligations of issuers that rely in whole or in part on State revenues for payment of such obligations. A decline in State revenues may adversely affect the obligations of these municipal security issuers. Like many states, Nebraska faced budgetary constraints as a result of the recession that started in the spring of 2001 and the events of September 11, 2001. State government was forced to confront a decline of approximately $648 million in forecasted tax receipts following the adoption of the biennial budget in 2001. During three successive legislative sessions about $521 million in fund lapses, spending cuts, and tax measures were adopted to begin to address the lack of revenue. The decline in actual and forecasted tax receipts was precipitous and occurred faster than the Legislature could implement changes to establish structural balance between tax receipts and appropriations.
The State ended the 2001-03 budget biennium $60 million short of the final forecast for 2001-03. This necessitated the short-term borrowing and repayment of $60 million from the Cash Reserve Fund. On November 20, 2003, the Legislative Fiscal Office reported a $211 million budget gap for the 2003-05 biennium as a consequence of revisions to current biennium forecasts of net General Fund tax receipts and State agency requests for supplemental (deficit) appropriations. For the first half of the fiscal year, net General Fund receipts for Sales and Use, and Individual Income taxes were below forecast by 2.4 and 0.1 percent, respectively. In February of 2004, the Nebraska Economic Forecasting Advisory Board lowered projections for fiscal year 2003-04 by $41million and $63 million for fiscal year 2004-05. Specifically, the board lowered personal income tax and sales tax projections while raising corporate income tax projections and maintaining miscellaneous tax projections at the current level.
Beginning in mid-2004, the general revenue picture in Nebraska began to improve significantly. In July 2004, total gross General Fund receipts for fiscal year 2003-04 were announced to be $3.3 billion, 2.9 percent above the February 2004 revised projection. After refunds, total net receipts for fiscal year 2003-04 were $2.72 billion, 4.2 percent above the projected total. For the year, net General Fund receipts for Sales and Use, Individual Income, Corporate Income, and Miscellaneous Taxes were above the revised forecast by 0.3, 4.5, 17.1, and 16.9 percent, respectively.
In April 2005, in connection with the 2005 legislative session, which approved a new two-year budget covering July 1, 2005, through June 30, 2007, the NEFB issued revised revenue forecasts projecting revenue growth of 7.7 percent for fiscal year 2004-05, 4.2 percent for fiscal year 2005-06, and 3.9 percent for fiscal year 2006-07. At the close of fiscal year 2004-05, actual receipts were $3 billion - $48 million above the April 2005 forecast.
In November 2005, the state tax commissioner reported that total gross General Fund receipts for the month of October 2005 were slightly more than $230 million, 1.6 percent above projection. For October 2005, gross Individual Income and Corporate Income taxes exceeded projections by 4.3 and 39.8 percent, respectively. Through October 2005, net receipts were ahead of projections for the first four months of fiscal year 2005-06 by $93.34 million. After refunds, total net receipts for the fiscal year through October were reported at slightly more than $1 billion, which was 9.8 percent above the projected total. For the year to date, net General Fund receipts for Sales and Use, Individual Income, Corporate Income and Miscellaneous taxes were above the forecast by 2.2, 2.9, 52.2 and 70.9 percent, respectively. In October 2005, the NEFB met and revised the forecast for fiscal year 2005-06 upward by $159.7 million to $3.25 billion.
Property taxes, all of which are collected for the use of local units of government, continue to be the single largest source of revenue for state and local government in Nebraska. Prior to the 1990 passage of LB 1059, which significantly altered the manner in which elementary and secondary education is funded in Nebraska, property taxes often equaled or exceeded all State tax collections. Property tax continues to bear a very significant load of the total tax burden in Nebraska. Net property taxes (net means after subtracting homestead exemptions or other credit programs) comprise 34 percent of the entire burden. Income taxes, individual and corporate, combine to contribute 26.1 percent of the total; sales taxes constitute 26.3 percent of the total. Any significant downturn in the real estate market may have an adverse impact on the total amount of property tax revenue generated by the State or local governments.
The foregoing information constitutes only a brief summary of some of the general factors which may impact certain issuers of Nebraska municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Nebraska Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Nebraska municipal bonds,
could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of Nebraska municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Fund to pay interest on or principal of such obligations.
Ohio. Ohio's economy is concentrated in automobile production and equipment, steel, rubber products and household appliances. Because Ohio and certain municipalities have large exposure to these industries, trends in these industries, over the long term, may impact the demographic and financial position of Ohio and its municipalities. In addition, this large exposure limits the diversity of Ohio bonds. As a result of this exposure, general economic activity, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. During the past two decades, both the number and percentage of manufacturing jobs, particularly in durable goods, has declined.
Although manufacturing (including auto-related manufacturing) remains the largest single major sector in Ohio, based on gross state product ("GSP"), the service-producing sectors now produce a combined 75 percent of the state GSP and are expected to account for virtually all job growth over the 2002-2012 period. Between 1990 and 2004, manufacturing employment in Ohio fell from 21.8 percent of wage and salary employment to 15.2 percent. During this same period, employment in professional and business services and in educational and health services increased from 20.1 percent to 25.3 percent. In 2004, Ohio's economic output as measured by GSP totaled nearly $420 billion, ranking it seventh among all states. The State ranks third within the manufacturing sector as a whole ($85 billion) and fourth in durable goods ($57 billion). Manufacturing was responsible for 20.2 percent of Ohio's 2004 GSP. The State's two leading export commodities are motor vehicles and machinery. Ohio firms ship products to 205 countries, and the State accounts for about 4.0 percent of the U.S. export total. Ohio merchandise exports were $31.2 billion in 2004.
One factor constraining Ohio's economic growth is its weakened demographic profile, particularly its difficulty holding on to its university graduates. To the degree that Ohio municipalities are exposed to domestic manufacturers that fail to make competitive adjustments, employment rates and disposable Income of Ohio residents may deteriorate, possibly leading to population declines and the erosion of municipality tax.
With approximately 10 million acres (of a total land area of 26.4 million acres) of harvestable cropland and an estimated 78,000 individual farms, agriculture combined with related agricultural sectors is an important segment of Ohio's economy. Because of agriculture's importance, Ohio is subject to unique natural hazard risks. The availability of natural resources, such as water and energy, is of vital nationwide concern. Cycles of drought and flooding are concerns insofar as they affect agricultural production. In 2005, Ohio's agricultural production continued to improve; average corn yield for 2005 was estimated at 143 bushels per acre, the fourth-best in Ohio's corn yield history and tying with production in 1992.
Ohio's seasonally adjusted unemployment rate was 5.9 percent in October 2005, unchanged from September 2004 and down from 6.2 percent in October 2004 and from 6.1 percent in November 2003. The U.S. seasonally adjusted unemployment for October 2005 was 5.0 percent.
The State operates on the basis of a fiscal biennium for its appropriations and expenditures. Under current law that biennium for operating purposes runs from July 1 in an odd-numbered year to June 30 in the next odd-numbered year. The current fiscal biennium began July 1, 2005 and will end June 30, 2007. Most State operations are financed through the general revenue fund ("GRF"). Personal income and sales use taxes are the major GRF sources. The last complete fiscal biennium ended June 30, 2005 with a GRF budgetary fund balance of $138.4 million. The State also maintains a "rainy day" fund, the Budget Stabilization Fund ("BSF"), generally funded by designation from the fiscal year GRF surplus, if any, and which under current law and until used is intended to carry a balance of approximately 5 percent of the GRF revenue for the preceding fiscal year. As of June 30, 2005, the BSF had an ending balance of $180.7 million. Since most of Ohio's tax revenues come from volatile sources--sales and personal income taxes--the result has been fiscal stress in each recession for the last 30 years. Growth and depletion of GRF ending fund balances show a consistent pattern related to national economic conditions, with the ending fiscal year balance reduced during less favorable and increased during more favorable economic periods.
In June 2005, in connection with passage of the fiscal year 2006-07 biennial budget by the Ohio legislature, the Ohio Office of Budget and Management ("OBM") presented revised GRF projections for fiscal years 2006 and 2007,
which reduced growth rate predictions based primarily on concerns regarding recent economic indicators, including weakened manufacturing and industrial production. The OBM revised estimates projected total state-only revenues of $20,192.2 million for fiscal year 2006 and $20,337.3 million for fiscal year 2007.
Actual GRF receipts for fiscal year 2006 to-date have been slightly under estimates, primarily as a result of the State receiving less than estimated federal grants. For the month of October 2005, GRF receipts totaled $1,990.5 million, which was $32.1 million, or 1.6 percent, under estimate. GRF tax sources generated $1,521.3 million in October, which was $83.9 million, or 5.8 percent, above estimate, while federal grants received came in $121.0 million, or 21.3 percent, below estimates.
Through October 2005, all GRF sources stood at $8,051.0 million for the year-to-date, which was $53.7 million, or 0.7 percent, below estimate. GRF tax sources were $48.6 million, or 0.8 percent, above estimate. On a year-over-year basis, GRF sources have grown $401.8 million, or 5.3 percent, and GRF tax sources have grown $294.9 million, or 5.2 percent. Growth rates were affected by additional revenue from the increase in the cigarette tax and by decreased revenue from the cut in the sales tax rate.
Most capital improvements in Ohio are funded through the issuance of debt. A 1999 constitutional amendment provides an annual debt service "cap" applicable to future issuances of State general obligations and other State direct obligations payable from the GRF or net State lottery proceeds. Generally, new bonds may not be issued if future fiscal year debt service on those new and the then outstanding bonds of those categories would exceed 5 percent of the total estimated GRF revenues plus net State lottery proceeds during the fiscal year of issuance. The State's debt burden is considered moderate by national standards and Ohio's Constitutional requirement of using no more than 5 percent of annual GRF revenue for debt service is regarded as reasonable and responsible. The State's incurrence or assumption of direct debt without a vote of the people is, with limited exceptions, prohibited by current State constitutional provisions. The State may incur debt, limited in amount to $750,000, to cover casual deficits or failures in revenues or to meet expenses not otherwise provided for. The Constitution expressly precludes the State from assuming the debts of any local government or corporation (an exception is made in both cases for any debt incurred to repel invasion, suppress insurrection, or defend the State in war).
State and local agencies issue obligations that are payable from revenues from or relating to certain facilities (but not from taxes). By judicial interpretation, these obligations are not "debt" within constitutional provisions. In general, payment obligations under lease-purchase agreements of Ohio public agencies (in which certificates of participation may be issued) are limited in duration to the agency's fiscal period, and are dependent upon appropriations being made available for the subsequent fiscal period.
Ohio's nearly 950 incorporated cities and villages rely primarily on property and municipal income taxes for their operations, and, with other local governments, receive local government support and property tax relief moneys distributed by the State. Ohio is the only state that shares collections from all of its major taxes and allows local governments to levy those same taxes while keeping 100 percent of the property tax. The problem, however, is that a shared tax base limits tax policy options of the State and local governments and blurs the connection between taxes paid and services rendered - especially true in K-12 and human services. Additionally, there can be no assurance that any particular level of State aid to local governments will be maintained in future years.
The Ohio Constitution directs or restricts the use of certain revenues. Highway fees and excises, including gasoline taxes, are limited in use to highway-related purposes. Not less than 50 percent of the receipts from State income taxes and estate taxes must be returned to the originating political subdivisions and school districts. State net lottery profits are allocated to elementary, secondary, vocational and special education program purposes including application to debt service on obligations issued to finance capital facilities for a system of common schools.
For those few municipalities that have faced significant financial problems, there are statutory procedures for a joint state/local commission to monitor the municipality's fiscal affairs and for development of a financial plan to eliminate deficits and cure any defaults. Since inception in 1979, these procedures have been applied to 12 cities and 14 villages; for 19 of them the fiscal situation was resolved and the procedures terminated. At present the State itself does not levy ad valorem taxes on real or tangible personal property. Those taxes are levied by political subdivisions and other local taxing districts. Since 1934 the State Constitution has limited the amount of the aggregate levy (including a levy for un-voted general obligations) of property taxes by all overlapping subdivisions, without a vote of
the electors or a municipal charter provision, to 1 percent of true value in money, and statutes limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly referred to as the "ten-mill limitation"). Voted general obligations of subdivisions are payable from property taxes that are unlimited as to amount or rate. The Constitution also authorizes the issuance of State obligations for certain purposes, the owners of which do not have the right to have excises or taxes levied to pay debt service. Such State obligations are generally secured by biennial appropriation lease agreements with the State.
The State has enacted legislation allocating its anticipated share of the proceeds of the national tobacco settlement. A comprehensive allocation has been made through fiscal year 2012 and a partial allocation has been made thereafter through fiscal year 2025. (In light of the constitutional two-year limitation on appropriations, those allocations are subject to the General Assembly making biennial appropriations to fund them, and those allocations themselves are subject to adjustment by the General Assembly.) As currently allocated and except for fiscal years 2002 through 2004, none of the moneys is to be applied to existing operating programs of the State. A portion of settlement moneys has been and will continue to be used to assist in addressing the State's recent GRF revenue shortfall situation. Under current allocations, the main portion of the moneys in future bienniums is to go to assist in the financing of elementary and secondary school capital facilities. Other amounts are targeted for new programs for smoking cessation and other health-related purposes, biomedical research and technology transfer, and assistance to the tobacco growing areas in the State.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Ohio municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Ohio Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Ohio municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of Ohio municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Fund to pay interest on or principal of such obligations.
Oregon. In the 1970s, Oregon grew rapidly due to population increases and continued economic diversification. Oregon grew much faster than the nation during this period, and from 1975 to 1980, non-farm jobs grew by 25 percent in Oregon versus 17 percent nationally. The 1980s saw continued diversification of Oregon's economy as the timber industry continued to decline. The high technology expansion was beginning, but did not create enough jobs to offset the timber industry losses. In the 1990s, Oregon continued to diversify. Low costs, abundant natural resources and a perceived high quality of life attracted both people and firms to the State. After its robust expansion during the 1990s, Oregon's economic growth slowed rather sharply in 1998 as exports and foreign investment dropped off during the Asian crisis. The economic recoveries of Oregon's key Asian trading partners boosted export growth between 1998 and 2000. In 2001, an information technology slowdown significantly dampened growth in Oregon's high-tech sector. At the same time, as California's economy strengthened, net in-migration slowed and population growth moderated, dampening the growth in the construction, retail, and service-related sectors. For the first time since 1985, job growth slipped below the national pace in 1998 and stayed there in 2001 and 2002.
In 2004, Oregon started with an unemployment rate of 7.7 percent, the highest of all 50 states. Job growth through much of 2004 and 2005 helped pull the unemployment rate down to 7.3 percent in October 2004 and to 6.0 percent by October 2005. The October 2005 rate was the lowest reading in more than four years and marked the first time since April 2001 that Oregon's unemployment rate had been at 6.0 percent or below. Oregon's unemployment rate decrease between October 2004 and October 2005 was the second largest among the states, second only to Florida. The national unemployment rates for October 2004 and October 2005 were 5.5 percent and 5.0 percent, respectively.
Oregon's seasonally adjusted nonfarm payroll employment rose by 1,200 jobs in October 2005, marking five consecutive months of seasonally adjusted growth. From October 2004 to October 2005, employment rose by 49,000 jobs, or three percent. By comparison, the national increase from October 2004 to October 2005 was just 2.2 percent. In December 2005, the Oregon Office Of Economic Analysis ("OEA") projected that total Oregon nonfarm jobs would grow by 1.8 percent in 2006 and by 1.4 percent in 2007, compared with 1.5 percent and 1.3 percent for those same years
nationally. Gains of that magnitude should keep pace with the State's population, which is expected to grow by approximately 1.25 percent.
Oregon's employment shift of recent years has been significant. The State's forest products sector accounted for about 10 percent of Oregon's gross state product 14 years ago, while electronics accounted for less than three percent. By 2000, the forest products sector accounted for roughly 3 percent of Oregon output, while electronics and instruments reached 15 percent. Recently, high-tech has accounted for about $13 billion in annual sales in Oregon, while forestry and wood products bring in roughly $4 billion. Recently, agriculture and food processing has accounted for about $3 billion in sales while durable goods manufacturing in metals and transportation equipment is worth about $2 billion.
In its December 2005 forecast, the OEA predicted that manufacturing employment will repeat 2004 with a relatively solid growth of 2.8 percent in 2005 but then will be flat in 2006 and decline 0.9 percent in 2007. Wood products employment is projected to show increases of 2.4 percent in 2005 and 0.8 percent in 2006, with losses of 1.3 percent in 2007.
The dependence on the high-tech industry, accounting for about 25 percent of the overall state economy compared to an average of about 12 percent nationally, led Oregon into the recent national recession. The sector that contains semiconductors, computer and electronic products will again show job gains in 2005 with growth of 1.2 percent; however, jobs are expected to decline 2.3 percent in 2006 and 3.2 percent in 2007. The OEA forecast horizon goes out to 2011, and job levels still fail to reach the peak year of 2001. Continued outsourcing of manufacturing could slow growth in this region. Recent commitments to move research out of the country would be very harmful to Oregon's high technology sector.
The OEA predicts that rising regional energy prices may force more businesses to slow production and lay off workers. As of December 2005, natural gas prices had risen the past few months adding to production costs. Oil prices had crossed above $70 per barrel and retreated to $60 - still a relatively high price. The recent devastation from Hurricane Katrina could prove to be more serious to the U.S. energy sector than previous natural disasters. Roughly thirty percent of the nation's oil supply and over a fifth of the natural gas supply move through the Louisiana area and the estimated closure of production capacity is 95 percent. The near term disruption on gasoline and natural gas prices could be dramatic. Regionally, electricity generation may move towards natural gas powered turbine engines as the drought impacts the availability of hydro generation. Higher electricity prices in Oregon could result from being pegged to natural gas prices.
The OEA also warns of risks relating to PERS (the public employee retirement system) and possible state and local government budget shortfalls. The Oregon Supreme Court has overturned two major reforms of PERS which would have reduced the long-term debt liability related to PERS, according to some estimates, by nearly $10 billion, although Court did not rule out future Legislative reforms to PERS. Although the 2005-2007 biennium appears to need only small additional expenditures, state and local governments may need to increase taxes, reduce services, and/or increase bond financing in the future to cover potential unfunded liabilities for PERS. If increases in unfunded liabilities leads to increased tax rates, this could lead to a substantial negative impact on Oregon's economy. To the extent that spending cutbacks hit education and public infrastructure, the state could suffer longer-term impacts.
Oregon is also impacted dramatically by the economics of international trade. An extended disruption to international trade could severely impact Oregon's manufacturing and agricultural sectors. Additionally, as the dollar depreciates against other foreign currencies, U.S. exports are promoted. Oregon's manufacturing sector has a large dependency on international markets. If the U.S. dollar falls too quickly, this could harm Oregon's trading partners, weakening their economies and lowering their demand for Oregon products. A controlled lowering of the U.S. dollar is most beneficial to the Oregon economy.
The OEA concludes that the risks confronting Oregon are not balanced but that they are tilted toward more downside than upside, at least in the near term. In other words, risks are biased toward a milder growth scenario compared to our baseline forecast. The risks, of course, could change going forward as conditions change and certain risk factors would have been resolved, becoming part of the baseline assumptions.
The Oregon budget is approved on a biennial basis by separate appropriation measures. Although the governor recommends a budget, no omnibus budget measure is approved. A biennium begins July 1 and ends June 30 of odd-numbered years. Measures are passed for the approaching biennium during each regular legislative session, held beginning in January of odd-numbered years. The most significant feature of the budgeting process in Oregon is the constitutional requirement that the budget be in balance at the end of each biennium. Because of this provision, Oregon may not budget a deficit and is required to alleviate any revenue shortfalls within each biennium. The biennial budget for 2005-07 passed the Oregon Legislative Assembly in 2005.
In December 2005, the OEA updated its budgetary revenue forecasts from the previous September 2005 forecast. The December 2005 forecast for 2005-07 General Fund revenues exhibits considerable revisions relative to the prior forecast. The latest available information suggests that the recovery phase of this business cycle will last a quarter or more than previously expected, resulting in stronger income and tax estimates for 2005. Given similar long-term growth assumptions to prior forecasts, these revisions produce higher income tax projections in future years. The December 2005 forecast for General Fund revenues for the 2005-07 biennium is $11,654.0 million, an increase of $317.8 million over the September 2005 forecast. The beginning balance for the current biennium, which amounts to resources carried over from the prior biennium, equals $301.2 million. This is $55 million lower than the estimate for the prior forecast. Given the revised figure, available resource for the biennium total $11,955.2 million. Excluding anticipated expenditures of $11,493.7 million, the projection for the 2005-07 ending balance is $461.5 million.
For the 2007-09 biennium, total General Fund revenues are projected to amount to $12,655.5 million. Approximately $326.3 million in kicker refunds and credits result in revenue growth of 8.6 percent, compared to approximately 11.5 percent increases for the prior two biennia. General Fund revenues are projected to reach $14,423.2 million in the 2009-11 biennium, an increase of 14.0 percent relative to the previous biennium.
The personal income tax funds approximately 90 percent of the Oregon's general fund. Since most of Oregon's tax revenues come from volatile sources like income taxes - the result is often fiscal stress during times of recession. The State also relies heavily on property taxes, and both income and property taxes have been reduced by voters in recent years. Another approximately 5 percent of the general fund comes from corporate taxes - down from a 14 percent share in 1980, according to the OEA. Any future declines in these State revenue sources may lead to future fiscal insecurity and may contribute to future State budget deficits, which could also affect the obligations of local governments in the State.
The 1979 Legislative Assembly approved a statutory mechanism under which taxpayers could receive a tax refund if certain conditions occurred after the close of the legislative session. This statutory process was embedded in the State constitution by voters in November 2000. If the estimated revenues from either of two General Fund revenue categories of corporate tax or all other revenues (which includes the personal income tax) is exceeded by more than 2 percent, a tax credit for corporations or a tax refund for individuals is extended to all taxpayers in that category (also known as the "2 percent kicker"). For corporations, the credit is based on the tax liability for the calendar year containing the end of the biennium (for example, 1999 liability for the 1997-99 kicker). For individuals, the refund is based on the previous calendar year's tax liability (for example, the 1998 liability for the 1997-99 kicker). The refund has been triggered seven times since 1981 and was last triggered for the 1999-2001 biennium.
During the economically prosperous years of the late '90s, the State income tax brought in a lot of revenue. State legislators, rather than create a reserve, chose to rebate surplus revenues - those exceeding 2 percent of budget forecasts - in four 'kicker checks' to taxpayers between 1995 and 2001. Under the constitutional amendment adopted in November 2000, the State may retain the kicker moneys only if two-thirds of each house of the Legislative Assembly votes to keep the kicker. In the past, Oregon's budget problems have been exacerbated by the absence of a substantial rainy-day fund, which was not created until 2002.
A variety of general obligation and revenue bond programs have been approved in Oregon to finance public purpose programs and projects. General obligation bond authority requires voter approval of a constitutional amendment, while revenue bonds may be issued under statutory authority. However, under the Oregon Constitution the State may issue up to $50,000 of general obligation debt without specific voter approval. The Legislative Assembly has the right to place limits on general obligation bond programs, which are more restrictive than those approved by the voters. General obligation authorizations are normally expressed as a percentage of statewide value of taxable property.
Article XI-K of the Oregon Constitution authorizes the State to guaranty the general obligation bonded indebtedness of qualified Oregon school districts, education service districts and community college districts. The Article further authorizes issuance of general obligation bonds to provide funds, if needed, to satisfy the guaranty, providing the amount of State bonds issued and outstanding to cover such guaranteed debt may not exceed 0.5 percent of true cash value at any one time. As of December 31, 2004, the State had not issued any of its bonds pursuant to this authorization. As of November 10, 2005, 153 qualified districts have issued $2.67 billion in guaranteed bonds, with $1.82 billion of that total still outstanding.
After an approximately $2 billion decline in revenues during the 2001 03 biennium, the Legislative Assembly authorized the issuance of Oregon Appropriation Bonds to pay for education, human services and other expenditures and to provide a beginning General Fund balance for the next biennium. In April 2003, the State issued approximately $430 million in Oregon Appropriation Bonds. It was the Legislative Assembly's intention to use payments to the State under the Master Settlement Agreement entered into with the major tobacco companies to pay the debt service on the bonds. The bonds, however, are appropriation credits and payment is subject to an appropriation by the Legislative Assembly in each biennium. The State does not have authority to issue any more of these bonds.
Obligations of the State or local governments may be affected by legislation limiting the ability of State and local governments to raise revenue through new or additional taxes. In November 1996, voters approved Ballot Measure 47, the property tax cut and cap. It will reduce revenues to schools, cities, and counties by as much as $1 billion and put pressure on the General Fund to make up some or all of the difference. This constitutional amendment limited property taxes in 1997-1998 to the lesser of 90-percent of the 1995 1996 tax, or the 1994 1995 tax amount. For tax years following the 1997 1998 tax year, property tax increases are limited to 3 percent annually, subject to limited exceptions. Local governments' lost revenue may only be replaced by an increase in the State income tax, unless the voters approve replacement fees or charges. At least 50 percent of eligible voters must participate in an election in order for a voter-approved tax levy to be valid. Ballot Measure 50, another restriction on revenue sources, passed by Oregon voters in May of 1997, limits the taxes a property owner must pay. It limits taxes on each property by rolling back the 1997 98 assessed value of each property to 90 percent of its 1995-96 value.
The foregoing information constitutes only a brief summary of some of the general factors that may impact certain issuers of Oregon municipal obligations and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of such obligations held by the Oregon Intermediate Tax Free Fund are subject. This information has not been independently verified. Additionally, many factors, including national economic, social and environmental policies and conditions, which are not within the control of the issuers of Oregon municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of Oregon municipal obligations, the market value or marketability of such obligations or the ability of the respective issuers of the obligations acquired by the Fund to pay interest on or principal of such obligations.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the Prospectus 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 8 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 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. Concentrate its investments in a particular industry, except that any Fund with one or more industry concentrations implied by its name shall, in normal market conditions, concentrate in securities of issues within that industry or industries. For purposes of this limitation, the U.S. Government, and state or municipal governments and their political subdivisions are not considered members of any industry. Whether a Fund is concentrating in an industry shall be determined in accordance with the 1940 Act, as interpreted or modified from time to time by any regulatory authority having jurisdiction.
2. Borrow money or issue senior securities, except as permitted under the 1940 Act, as interpreted or modified from time to time by any regulatory authority having jurisdiction.
3. With respect to 75% of its total assets, purchase securities of an issuer (other than the U.S. Government, its agencies, instrumentalities or authorities or repurchase agreements fully collateralized by U.S. Government securities and other investment companies) if (a) such purchase would, at the time, cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would, at the time, result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. This investment restriction does not apply to the Tax Free Funds (other than Tax Free Fund, Short Tax Free Fund and Intermediate Tax Free Fund).
4. Invest for the primary purpose of control or management.
5. Purchase physical commodities or contracts relating to physical commodities. With respect to Inflation Protected Securities Fund, this restriction shall not prohibit the Fund from investing in options on commodity indices, commodity futures contracts and options thereon, commodity-related swap agreements, and other commodity-related derivative instruments.
6. Purchase or sell real estate unless as a result of ownership of securities or other instruments, but this shall not prevent the Funds from investing in securities or other instruments backed by real estate or interests therein or in securities of companies that deal in real estate or mortgages.
7. Act as an underwriter of securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, it may be deemed an underwriter under applicable laws.
8. Make loans except as permitted under the 1940 Act, as interpreted or modified from time to time by any regulatory authority having jurisdiction.
For purposes of applying the limitation set forth in number 1 above, according to the current interpretation by the Securities and Exchange Commission, the Fund would be concentrated in an industry if 25% or more of its total assets, based on current market value at the time of purchase, were invested in that industry. The Fund will use industry classifications provided by Bloomberg and Lehman Brothers to determine its compliance with this limitation.
For purposes of applying the limitation set forth in number 2 above, under the 1940 Act as currently in effect, the Fund is not permitted to issue senior securities, except that the Fund may borrow from any bank if immediately after such borrowing the value of the Fund's total assets is at least 300% of the principal amount of all of the Fund's borrowings (i.e., the principal amount of the borrowings may not exceed 33 1/3% of the Fund's total assets). In the event that such asset coverage shall at any time fall below 300% the Fund shall, within three days thereafter (not including Sundays and holidays) reduce the amount of its borrowings to an extent that the asset coverage of such borrowing shall be at least 300%.
For purposes of applying the limitation set forth in number 6 above, there
are no limitations with respect to unsecured loans made by the Fund to an
unaffiliated party. However, when the Fund loans its portfolio securities, the
obligation on the part of the Fund to return collateral upon termination of the
loan could be deemed to involve the issuance of a senior security within the
meaning of Section 18(f) of the 1940 Act. In order to avoid violation of Section
18(f), the Fund may not make a loan of portfolio securities if, as a result,
more than one-third of its total asset value (at market value computed at the
time of making a loan) would be on loan.
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:
1. Invest more than 15% of its net assets in all forms of illiquid investments.
2. Borrow money in an amount exceeding 10% of the borrowing Fund's total assets except that High Income Bond Fund may borrow up to one-third of its total assets and pledge up to 15% of its total assets to secure such borrowings. 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. No Fund will make additional investments while its borrowings exceed 5% of total assets.
3. Make short sales of securities.
4. Lend portfolio securities representing in excess of one-third of the value of its total assets.
With respect to the non-fundamental restriction set forth in number 1 above, the Fund will monitor portfolio liquidity on an ongoing basis and, in the event more than 15% of the Fund's net assets are invested in illiquid investments, the Fund will reduce its holdings of illiquid securities in an orderly fashion in order to maintain adequate liquidity.
The Board of Directors has adopted guidelines and procedures under which the Funds' investment advisor is to determine whether the following types of securities which may be held by certain Funds are "liquid" and to report to the Board concerning its determinations: (i) securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933; (ii) commercial paper issued in reliance on the "private placement" exemption from registration under Section 4(2) of the Securities Act of 1933, whether or not it is eligible for resale pursuant to Rule 144A; (iii) interest-only and principal-only, inverse floating and inverse interest-only securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities; and (iv) municipal leases and securities that represent interests in municipal leases.
For determining compliance with its investment restriction relating to
industry concentration, each Fund classifies asset-backed securities in its
portfolio in separate industries based upon a combination of the industry of the
issuer or sponsor and the type of collateral. The industry of the issuer or
sponsor and the type of collateral will be determined by the Advisor. For
example, an asset-backed security known as "Money Store 94-D 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.
PORTFOLIO TURNOVER
The portfolio turnover rates for Total Return Bond Fund, Intermediate Government Bond Fund, and U. S. Government Mortgage Fund were significantly higher during the fiscal year ended September 30, 2005 than during the fiscal year ended September 30, 2004.
- Total Return Bond Fund's portfolio turnover rate increased from 132% to 285%. This increase is attributable primarily to the change in the investment strategies of the Fund (formerly called the Corporate Bond Fund) from investing primarily in corporate debt obligations to investing primarily in a broader range of debt obligations, as described in the Fund's prospectuses.
- Intermediate Government Bond Fund's portfolio turnover rate increased from 53% to 161%. This was a result of both significant Fund redemptions and a strategic repositioning of the Fund's portfolio.
- U.S. Government Mortgage Fund's portfolio turnover rate increased from 127% to 251%. Because specified pools of mortgage-backed securities generally traded at expensive valuations during much of the fiscal year, the Fund focused on purchasing to-be-announced (TBA) positions and rolling those positions forward from month to month, rather than taking delivery, which increased portfolio turnover. In addition,
the Fund invested significantly in commercial paper and shorter duration mortgage-backed securities, which also contributed to the increased portfolio turnover rate.
FUND NAMES
With respect to any Fund that has adopted an investment strategy pursuant to Rule 35d-1 of the 1940 Act, whereby at least 80% of the Fund's net assets (plus the amount of any borrowings for investment purposes) must be invested in a strategy suggested by the Fund's name, a policy has been adopted by the Funds to provide shareholders with at least 60 days notice in the event of a planned change to the investment strategy. Such notice to shareholders will meet the requirements of Rule 35d-1(c).
DISCLOSURE OF PORTFOLIO HOLDINGS
PUBLIC DISCLOSURE
Each Fund is required by the SEC to file its portfolio holdings schedule with the SEC on a quarterly basis. This schedule is filed with each fund's annual and semi-annual reports on form N-CSR for the second and fourth fiscal quarters and on Form N-Q for the first and third fiscal quarters. These filings are generally available within sixty days of the end of the relevant Fund's fiscal quarter. In addition, the First American Fund Family makes portfolio holdings information publicly available for all First American Funds other than Equity Index Fund, Mid Cap Index Fund and Small Cap Index Fund (the "Index Funds," series of FAIF), and the series of FAF (the "Money Market Funds"), which are money market funds, by posting the information on the First American Funds website on a quarterly basis. The Funds will attempt to post such information within ten days of the quarter end. Until such time as it is posted, it will be Nonpublic Holdings Information, as defined below, and subject to the Funds' procedures regarding the disclosure of Nonpublic Holdings Information.
NONPUBLIC DISCLOSURE
The Funds' board of directors has adopted policies and procedures (the "Disclosure Policies"), which prohibit the release of information concerning portfolio holdings, or information derived therefrom ("Nonpublic Holdings Information"), that has not been made public through SEC filings or the website. Different exceptions to this prohibition are made depending on the type of third party that receives the Nonpublic Holdings Information. The Disclosure Policies are designed to prevent the use of portfolio holdings information to trade against the Funds, or otherwise use the information in a way that would harm the Funds, and to prevent selected investors from having nonpublic information that will allow them to make advantageous decisions with respect to purchasing and selling Fund shares.
Because the portfolios of the Index Funds generally mirror the composition of published indices, the Index Funds are not subject to the Disclosure Policies. In addition, the Money Market Funds are not subject to the Disclosure Policies because these Funds hold only short-term money market securities that generally do not vary significantly in value over short periods of time. Because of the types of securities held by the foregoing Funds, such Funds' portfolio holdings information would not be subject to the types of misuses that the Disclosure Policies are designed to prevent.
Disclosure within the Advisor and to Fund Directors. Nonpublic Holdings Information and information derived therefrom may be provided to any individuals employed by the Advisor and who have a need to know the information, such as investment, compliance, and treasury personnel, without prior approval. The Advisor's employees are bound by the Disclosure Policies and by the Advisor's Code of Ethics which precludes them from trading on the basis of Nonpublic Holdings Information.
Nonpublic Holdings Information and information derived therefrom also may be provided to directors of the First American Funds and their service providers, such as counsel, as part of the materials for regular or special Board of Directors meetings without prior approval. These parties have pre-existing fiduciary duties or duties of confidentiality arising from the Funds' Code of Ethics or from established rules of professional responsibility and ethical conduct. These parties are not required to enter into written confidentiality agreements prior to receipt of Nonpublic Holdings Information, and therefore, the fund would be precluded from pursuing a breach of contract claim against such a party if that party misused Nonpublic Holdings Information.
Disclosure to Fund Service Providers and Prospective Service Providers. Nonpublic Holdings Information may be provided to organizations that provide or propose to provide services to the First American Funds, such as sub-advisors, custodians, administrators, transfer agents, securities lending agents, outside accountants, outside counsel, entities that provide Class B share financing, proxy voting organizations, financial printers, pricing services and the like, provided that such organization has entered into a written agreement with the Funds to maintain the information in confidence and use the information only for the purpose for which it is provided, and not to trade on the basis of such information. Before Nonpublic Holdings Information is provided to a new service provider or a prospective service provider, the Director of FAF Advisors' Product Marketing Group must approve the provision of the information as being made strictly on a need to know basis and in the best interest of the fund involved. Any such determination made during a calendar quarter shall be reported to the Chief Compliance Officer within 10 days of the end of the quarter, and shall be subject to Compliance oversight.
Ongoing Arrangements. The Funds currently provide Nonpublic Holdings Information on a weekly basis to an entity that provides Class B share financing to the Funds, and Nonpublic Holdings Information is provided on a quarterly basis to an entity that provides post-trade execution analysis with respect to securities trades made for the Funds.
Disclosure to Investors, Prospective Investors, and Investor Consultants. Nonpublic Holdings Information may not be provided to investors, prospective investors or investor consultants without prior approval of the Funds' Chief Compliance Officer. The Chief Compliance Officer will only approve such disclosure after (1) concluding that disclosure is in the best interests of the relevant Fund and its shareholders, (2) considering any conflict of interest between the Fund and its shareholders on the one hand and the Fund's advisor and the advisor's affiliates on the other hand, and (3) the recipient has agreed in writing to maintain the confidentiality of the Nonpublic Holdings Information and not to trade on the basis of any such information that is material nonpublic information. If the Chief Compliance Officer determines that there is a conflict of interest between the Fund and its shareholders on the one hand and the Fund's advisor or the advisor's affiliates on the other hand, he or she will approve such disclosure only if he or she determines that such conflict is materially mitigated by the execution of a confidentiality agreement and that, despite such conflict of interest, disclosure is in the best interests of the relevant Fund and its shareholders. The Funds' Chief Compliance Officer is responsible for the creation of a written record that states the basis for the conclusion that the disclosure is in the best interests of the relevant Fund and its shareholders.
Disclosure to Fund Ranking and Ratings Organizations. Nonpublic Holdings Information may be provided to organizations that provide mutual fund rankings and ratings, such as Morningstar, Lipper, Moody's, and Standard & Poor's, and to entities that provide investment coverage and/or analytical information regarding a Fund's portfolio, provided that the recipient has entered into a written agreement with the Fund to maintain the information in confidence and use the information only for the purpose for which it is provided, and not to trade on the basis of any such information that is material nonpublic information. Before Nonpublic Holdings Information is provided to a new ranking or rating organization or entity that provides investment coverage and/or analytical information, the Director of FAF Advisors' Product Marketing Group must approve the provision of the information as being made strictly on a need to know basis and in the best interest of the fund involved. Any such determination made during a calendar quarter shall be reported to the Chief Compliance Officer within 10 days of the end of the quarter, and shall be subject to Compliance oversight.
Disclosure as Required by Applicable Law. Undisclosed Holdings Information may be disclosed to any person as required by applicable laws, rules and regulations. For example, such information may be disclosed in response to regulatory requests for information or in response to legal process in litigation matters.
Disclosure of Limited Holdings. Portfolio managers, analysts and other personnel of the Advisor and any sub-advisor may discuss portfolio information in interviews with members of the media, or in due diligence or similar meetings with clients or prospective purchasers of fund shares or their representatives. In no case will a material number of portfolio holdings be provided that have not yet been posted on the First American Funds website or filed with the SEC unless the recipient has agreed in writing to maintain the confidentiality of such information and not to trade on the basis of any such information which is material nonpublic information. Materiality is a subjective judgment, however, and there is a risk that information deemed immaterial by the portfolio manager, analyst, or other employee of the Advisor could be used in a manner adverse to a Fund ad its shareholders. In addition, brokers and
dealers may be provided with individual portfolio holdings in order to obtain bids or bid and asked prices (if securities held by a Fund are not priced by the Fund's regular pricing services) or in connection with portfolio transactions.
No Compensation or Consideration. Neither the Funds, nor their investment advisor or any sub-advisor or any affiliate of either, including the Chief Compliance Officer or his or her designee, will solicit or accept any compensation or other consideration in connection with the disclosure of Nonpublic Holdings Information.
The Funds' Chief Compliance Officer must provide a quarterly report to the Funds' board of directors addressing exceptions to these policies and procedures, if any.
Under the foregoing policies and procedures, in the event of the absence or unavailability of the Chief Compliance Officer, all of the obligations of the Chief Compliance Officer may be performed by his or her designee.
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. The Board of Directors is generally responsible for the overall operation and management of FAIF. Each of the Directors in an independent director.
INDEPENDENT DIRECTORS
OTHER
POSITION(S) NUMBER OF PORTFOLIOS DIRECTORSHIPS
NAME, ADDRESS, HELD TERM OF OFFICE PRINCIPAL OCCUPATION(S) IN FUND COMPLEX HELD BY
AND YEAR OF BIRTH WITH FUND AND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY DIRECTOR DIRECTOR*
----------------- ----------- -------------------------- ---------------------------- -------------------- ----------------
Benjamin R. Field Director Term expiring earlier of Retired; Senior Financial First American Funds None
III, death, resignation, Advisor, Bemis Company, Inc. Complex: twelve
P.O. Box 1329, removal, disqualification, from May 2002 through June registered
Minneapolis, or successor duly elected 2004; Senior Vice President, investment
Minnesota and qualified. Director Chief Financial Officer and companies, including
55440-1329 of FAIF since September Treasurer, Bemis Company, 58 portfolios
(1938) 2003. through April 2002
Roger A. Gibson, Director Term expiring earlier of Retired; Vice President, First American Funds None
P.O. Box 1329, death, resignation, Cargo - United Airlines, Complex: twelve
Minneapolis, removal, disqualification, from July 2001 through July registered
Minnesota or successor duly elected 2004; Vice President, North investment
55440-1329 and qualified. Director of America-Mountain Region for companies, including
(1946) FAIF since October 1997. United Airlines prior to 58 portfolios
July 2001)
Victoria J. Herget, Director Term expiring earlier of Investment consultant and First American Funds None
P.O. Box 1329, death, resignation, non-profit board member Complex: twelve
Minneapolis, removal, disqualification, since 2001; Managing registered
Minnesota or successor duly elected Director of Zurich Scudder investment
55440-1329 and qualified. Director Investments through 2001 companies, including
(1951) of FAIF since September 58 portfolios
2003.
Leonard W. Kedrowski, Director Term expiring earlier of Owner, Executive and First American Funds None
P.O. Box 1329, death, resignation, Management Consulting, Inc., Complex: twelve
Minneapolis, removal, disqualification, a management consulting registered
Minnesota or successor duly elected firm; Board member, GC investment
55440-1329 and qualified. Director of McGuiggan Corporation (dba companies, including
(1941) FAIF since November 1993. Smyth Companies), a label 58 portfolios
printer; former Chief
Executive Officer, Creative
Promotions International,
LLC, a promotional award
programs and products
company, through October
2003; Advisory Board Member,
Designer Doors, a
manufacturer of designer
doors, through 2002
|
OTHER
POSITION(S) NUMBER OF PORTFOLIOS DIRECTORSHIPS
NAME, ADDRESS, HELD TERM OF OFFICE PRINCIPAL OCCUPATION(S) IN FUND COMPLEX HELD BY
AND YEAR OF BIRTH WITH FUND AND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY DIRECTOR DIRECTOR*
----------------- ----------- -------------------------- ---------------------------- -------------------- ----------------
Richard K. Riederer, Director Term expiring earlier of Retired; Director, President First American Funds Cleveland-Cliffs
P.O. Box 1329, death, resignation, and Chief Executive Officer, Complex: twelve Inc. (a
Minneapolis, removal, disqualification, Weirton Steel through 2001 registered producer of
Minnesota or successor duly elected investment iron ore
55440-1329 and qualified. Director of companies, including pellets)
(1944) FAIF since August 2001. 58 portfolios
Joseph D. Strauss, Director Term expiring earlier of Attorney At Law, Owner and First American Funds None
P.O. Box 1329, death, resignation, President, Strauss Complex: twelve
Minneapolis, removal, disqualification, Management Company, a registered
Minnesota or successor duly elected Minnesota holding company investment
55440-1329 and qualified. Director of for various organizational companies, including
(1940) FAIF since April 1991. management business 58 portfolios
ventures; Owner, Chairman
and Chief Executive Officer,
Community Resource
Partnerships, Inc., a
strategic planning,
operations management,
government relations,
transportation planning and
public relations
organization; Owner,
Chairman and Chief Executive
Officer, Excensus(TM) LLC, a
strategic demographic
planning and application
development firm, since 2001
Virginia L. Stringer, Chair; Chair term three years. Owner and President, First American Funds None
P.O. Box 1329, Director Director term expiring Strategic Management Complex: twelve
Minneapolis, earlier of death, Resources, Inc., a registered
Minnesota resignation, removal, management consulting firm; investment
55440-1329 disqualification, or Executive Consultant for companies, including
(1944) successor duly elected and State Farm Insurance Cos 58 portfolios
qualified. Chair of FAIF's through 2003
Board since September
1997; Director of FAIF
since September 1987.
James M. Wade, Director Term expiring earlier of Owner and President, Jim First American Funds None
P.O. Box 1329, death, resignation, Wade Homes, a homebuilding Complex: twelve
Minneapolis, removal, disqualification, company, since 1999 registered
Minnesota or successor duly elected investment
55440-1329 and qualified. Director of companies, including
(1943) FAIF since August 2001. 58 portfolios
|
EXECUTIVE OFFICERS
NAME, ADDRESS, AND YEAR POSITION(S) HELD TERM OF OFFICE AND OF BIRTH WITH FUND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ----------------------- ------------------- --------------------- ---------------------------------------------------- Thomas S. Schreier, Jr., President Re-elected by the Chief Executive Officer of FAF Advisors, Inc. FAF Advisors, Inc., Board annually; 800 Nicollet Mall, President of FAIF Minneapolis, Minnesota since February 2001 55402 (1962)* |
NAME, ADDRESS, AND YEAR POSITION(S) HELD TERM OF OFFICE AND
OF BIRTH WITH FUND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
----------------------- ------------------- --------------------- ----------------------------------------------------
Mark S. Jordahl, Vice President - Re-elected by the Chief Investment Officer of FAF Advisors, Inc. since
FAF Advisors, Inc. Investments Board annually; Vice September 2001
800 Nicollet Mall, President -
Minneapolis, Minnesota Investments of FAIF
55402 (1960)* since September 2001
Jeffery M. Wilson, Vice President - Re-elected by the Senior Vice President of FAF Advisors, Inc.
FAF Advisors, Inc. Administration Board annually; Vice
800 Nicollet Mall, President -
Minneapolis, Minnesota Administration of
55402 (1956)* FAIF since March 2000
Charles D. Gariboldi, FAF Treasurer Re-elected by the Mutual Funds Treasurer, FAF Advisors, Inc., since
Advisors, Inc. Board annually; October 2004; prior thereto, Vice President for
800 Nicollet Mall, Treasurer of FAIF investment accounting and fund treasurer of Thrivent
Minneapolis, Minnesota Since December 2004 Financial for Lutherans
55402 (1959)*
Jill M. Stevenson, Assistant Treasurer Re-elected by the Assistant Treasurer, FAF Advisors, Inc. since
FAF Advisors, Inc. Board annually; September 2005; Director, Senior Project Manager,
800 Nicollet Mall, Assistant Treasurer FAF Advisors, Inc. from May 2003 to September 2005;
Minneapolis, MN 55402 of FAIF since prior thereto, Vice President, Director of
(1965)* September 2005 Operations, Paladin Investment Associates, LLC
David H. Lui, Chief Compliance Re-elected by the Chief Compliance Officer of FAF Advisors, Inc. since
FAF Advisors, Inc. Officer Board annually; March 2005; Chief Compliance Officer, Franklin
800 Nicollet Mall, Chief Compliance Advisors, Inc. and Chief Compliance Counsel,
Minneapolis, MN 55402 Officer of FAIF since Franklin Templeton Investments from March 2004 to
(1960)* February 2005 March 2005; prior thereto, Vice President, Charles
Schwab & Co., Inc.
Jason K. Mitchell Anti-money Re-elected by the
FAF Advisors, Inc. Laundering Officer Board annually;
800 Nicollet Mall Anti-Money Laundering
Minneapolis, Minnesota Officer of FAIF since
55402 (1976)* September 2006
Kathleen L. Prudhomme, Secretary Re-elected by the Deputy General Counsel, FAF Advisors, Inc., since
FAF Advisors, Inc. Board annually; November 2004; prior thereto, Partner, Dorsey &
800 Nicollet Mall, Secretary of FAIF Whitney LLP, a Minneapolis- based law firm
Minneapolis, Minnesota since December 2004;
55402 (1953)* Assistant Secretary
of FAIF from
September 1998
through December 2004
Brett L. Agnew, Assistant Secretary Re-elected by the Attorney, FAF Advisors, Inc., since August 2004;
FAF Advisors, Inc. Board annually; Senior Counsel, Thrivent Financial for Lutherans
800 Nicollet Mall Assistant Secretary from 2001 to August 2004; prior thereto, consultant,
Minneapolis, Minnesota of FAIF since Principal Financial Group
55402 (1971)* December 2004
James D. Alt, Assistant Re-elected by the Partner, Dorsey & Whitney LLP, a Minneapolis-based
50 South Sixth Street, Secretary Board annually; law firm
Suite 1500, Minneapolis, Assistant Secretary
Minnesota 55402 (1951) of FAIF since
December 2004;
Secretary of FAIF
from June 2002
through December
2004; Assistant
Secretary of FAIF
from September 1998
through June 2002
|
NAME, ADDRESS, AND YEAR POSITION(S) HELD TERM OF OFFICE AND
OF BIRTH WITH FUND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
----------------------- ------------------- --------------------- ----------------------------------------------------
James R. Arnold, Assistant Secretary Re-elected by the Vice President, U.S. Bancorp Fund Services, LLC
615 E. Michigan Street, Board annually; since March 2002; prior thereto, Senior
Milwaukee, WI 53202 Assistant Secretary Administration Services Manager, UMB Fund Services,
(1957)* of FAIF since June Inc. through March 2002
2003
Douglas G. Hess, Assistant Secretary Re-elected by the Vice President, U.S. Bancorp Fund Services, LLC
615 E. Michigan Street, Board annually;
Milwaukee, WI 53202 Assistant Secretary
(1967) * of FAIF since
September 2001
|
* Messrs. Schreier, Jordahl, Wilson, Gariboldi, Lui, Mitchell, Agnew, Ms. Stevenson and Ms. Prudhomme are each officers and/or employees of FAF Advisors, Inc., which serves as investment advisor and administrator for FAIF. Messrs. Arnold and Hess are officers of U.S. Bancorp Fund Services, LLC, which is a subsidiary of U.S. Bancorp and which serves as transfer agent for FAIF.
STANDING COMMITTEES OF THE BOARD OF DIRECTORS
There are currently three standing committees of the FAIF Board of Directors: Audit Committee, Pricing Committee and Governance Committee.
NUMBER OF FUND
COMPLEX COMMITTEE
MEETINGS HELD
DURING FAIF'S
FISCAL PERIOD
COMMITTEE FUNCTION COMMITTEE MEMBERS ENDED 6/30/06
------------------------------------------- ---------------------------- -----------------
Audit Committee The purposes of the Committee are (1) to Leonard W. Kedrowski (Chair) 7
oversee the Funds' accounting and financial Benjamin R. Field III
reporting policies and practices, their Richard K. Riederer
internal controls and, as appropriate, the Virginia L. Stringer
internal controls of certain service (ex-officio)
providers; (2) to oversee the quality of
the Funds' financial statements and the
independent audit thereof; (3) to assist
Board oversight of the Funds' compliance
with legal and regulatory requirements; and
(4) to act as a liaison between the Funds'
independent auditors and the full Board of
Directors. The Audit Committee, together
with the Board of Directors, has the
ultimate authority and responsibility to
select, evaluate and, where appropriate,
replace the outside auditor (or to nominate
the outside auditor to be proposed for
shareholder approval in any proxy
statement).
Pricing Committee The Committee is responsible for valuing Roger A. Gibson (Chair) 3
portfolio securities for which market James M. Wade
quotations are not readily available, Benjamin R. Field III
pursuant to procedures established by the Virginia L. Stringer
Board of Directors. (ex-officio)
Governance Committee The Committee has responsibilities relating Joseph D. Strauss (Chair) 4
to (1) Board and Committee composition James M. Wade
(including, interviewing and recommending Victoria J. Herget
to the Board nominees for election as Virginia L. Stringer
directors; reviewing the independence of (ex-officio)
all independent directors; reviewing Board
composition to determine the
appropriateness of adding individuals with
different backgrounds or skills; reporting
to the Board on which current and potential
members of the Audit Committee qualify as
Audit Committee Financial Experts;
recommending a successor to the Board Chair
when a vacancy occurs; consulting with the
Board Chair on Committee assignments; and
in anticipation of the Board's request for
shareholder approval of a slate of
directors, recommending to the Board the
slate of directors to be presented for
Board and shareholder approval); (2)
Committee structure (including, at least
annually, reviewing each Committee's
structure and membership and
|
NUMBER OF FUND
COMPLEX COMMITTEE
MEETINGS HELD
DURING FAIF'S
FISCAL PERIOD
COMMITTEE FUNCTION COMMITTEE MEMBERS ENDED 6/30/06
------------------------------------------- ---------------------------- -----------------
reviewing each Committee's charter and
suggesting changes thereto); (3) director
education (including developing an annual
education calendar; monitoring independent
director attendance at educational seminars
and conferences; developing and conducting
orientation sessions for new independent
directors; and managing the Board's
education program in a cost-effective
manner); and (4) governance practices
(including reviewing and making
recommendations regarding director
compensation and director expenses;
monitoring director investments in the
Funds; monitoring compliance with director
retirement policies; reviewing compliance
with the prohibition from serving on the
board of directors of mutual funds that are
not part of the First American Fund
Complex; if requested, assisting the Board
Chair in overseeing self-evaluation
process; in collaboration with outside
counsel, developing policies and procedures
addressing matters which should come before
the Committee in the proper exercise of its
duties; reviewing the Board's adherence to
industry "best practices;" reviewing and
recommending changes in Board governance
policies, procedures and practices;
reporting the Committee's activities to the
Board and making such recommendations;
reviewing and, as appropriate; recommending
that the Board make changes to the
Committee's charter).
|
In addition to the above committees, the Board of Directors also appoints a Fund Review Liaison. The responsibility of the Fund Review Liaison is to lead the Board of Directors, together with the Board Chair, in evaluating Fund performance, Fund service provider contracts and arrangements for execution of Fund trades. Ms. Herget is the current Fund Review Liaison.
The Governance Committee will consider shareholder recommendations for director nominees in the event there is a vacancy on the Board of Directors or in connection with any special shareholders meeting which is called for the purpose of electing directors. FAIF does not hold regularly scheduled annual shareholders meetings. There are no differences in the manner in which the Governance Committee evaluates nominees for director based on whether the nominee is recommended by a shareholder.
A shareholder who wishes to recommend a director nominee should submit his or her recommendation in writing to the Chair of the Board (Ms. Stringer) or the Chair of the Governance Committee (Mr. Strauss), in either case at First American Funds, P.O. Box 1329, Minneapolis, Minnesota 55440-1329. At a minimum, the recommendation should include:
- the name, address, and business, educational, and/or other pertinent background of the person being recommended;
- a statement concerning whether the person is "independent" within the meaning of New York Stock Exchange and American Stock Exchange listing standards and is not an "interested person" as defined in the Investment Company Act of 1940;
- any other information that the Funds would be required to include in a proxy statement concerning the person if he or she was nominated; and
- the name and address of the person submitting the recommendation, together with the number of Fund shares held by such person and the period for which the shares have been held.
The recommendation also can include any additional information which the person submitting it believes would assist the Governance Committee in evaluating the recommendation. Shareholder recommendations for nominations to the Board will be accepted on an ongoing basis and will be kept on file for consideration when there is a vacancy on the Board or prior to a shareholders meeting called for the purpose of electing directors.
FUND SHARES OWNED BY THE DIRECTORS
The information in the table below discloses the dollar ranges of (i) each Director's beneficial ownership in FAIF, and (ii) each Director's aggregate beneficial ownership in all funds within the First American Funds complex.
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY SECURITIES IN THE
NAME OF DIRECTOR EQUITY SECURITIES IN FAIF FIRST AMERICAN FUNDS COMPLEX*
---------------- ------------------------- -----------------------------
Benjamin R. Field III $10,001-$50,000 Over $100,000
Roger A. Gibson Over $100,000 Over $100,000
Victoria J. Herget Over $100,000 Over $100,000
Leonard W. Kedrowski $10,001-$50,000 Over $100,000
Richard K. Riederer Over $100,000 Over $100,000
Joseph D. Strauss Over $100,000 Over $100,000
Virginia L. Stringer Over $100,000 Over $100,000
James M. Wade Over $100,000 Over $100,000
|
* The dollar range disclosed is based on the value of the securities as of June 30, 2006.
As of October 31, 2005, none of the independent Directors or their
immediate family members owned, beneficially, or of record, any securities in
(i) an investment advisor or principal underwriter of the Funds or (ii) a person
(other than a registered investment company) directly of indirectly controlling,
controlled by, or under common control with an investment advisor or principal
underwriter of the Funds.
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF, FASF, and FACEF, currently pays directors who are not paid employees or affiliates of the Funds an annual retainer of $40,000 ($80,000 in the case of the Chair). The Fund Review Liaison receives an additional annual retainer of $15,000. In addition, directors are paid the following fees for attending Board and committee meetings:
- $5,000 per day for in-person attendance at Board of Directors meetings ($10,000 in the case of the Chair);
- $2,500 per day for telephonic attendance at Board of Directors meetings ($5,000 in the case of the Chair);
- $2,500 for in-person attendance at any committee meeting ($3,750 in the case of the committee chair, $4,250 for the Audit Committee Chair);
- $1,250 for telephonic attendance at any committee meeting ($1,875 in the case of the committee chair, $2,125 for the Audit Committee Chair); and
- $2,500 for in-person attendance at any opening executive session ($5,000 in the case of the Chair).
Directors also receive $2,500 per day when traveling, on behalf of a Fund, out of town on Fund business which does not involve a Board or committee meeting. In addition, directors are reimbursed for their out-of-pocket expenses in traveling from their primary or secondary residence to Board and committee meetings, on Fund business and to attend mutual fund industry conferences or seminars. The amounts specified in this paragraph are allocated among the funds in the First American Family of Funds.
The directors may elect to defer payment of up to 100% of the fees they receive in accordance with a Deferred Compensation Plan (the "Plan"). Under the Plan, a director may elect to have his or her deferred fees treated as if they had been invested in shares of one or more funds and the amount paid to the director under the Plan will be determined
based on the performance of such investments. Distributions may be taken in a lump sum or over a period of years. The Plan will remain unfunded for federal income tax purposes under the Internal Revenue Code of 1986, as amended. Deferral of director fees in accordance with the Plan will have a negligible impact on Fund assets and liabilities and will not obligate the Funds to retain any director or pay any particular level of compensation. The Funds do not provide any other pension or retirement benefits to directors.
Legal fees and expenses are also paid to Dorsey & Whitney LLP, the law firm of which James D. Alt, Assistant Secretary of FAIF, FAF, FASF, and FACEF, 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, FASF, and FACEF collectively (column 5) during the fiscal period ended June 30, 2006. No executive officer or affiliated person of FAIF received any compensation from FAIF in excess of $60,000 during such fiscal year or fiscal period.
Compensation During Fiscal Year Ended June 30, 2006
TOTAL COMPENSATION FROM
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL REGISTRANT AND FUND
COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON COMPLEX PAID TO
NAME OF PERSON, POSITION REGISTRANT (1) PART OF FUND EXPENSES RETIREMENT DIRECTORS (2)
------------------------ ----------------- --------------------- ---------------- -----------------------
Benjamin R. Field III, Director $______ -0- -0- $______
Roger A. Gibson, Director ______ -0- -0- ______
Victoria J. Herget, Director ______ -0- -0- ______
Leonard W. Kedrowski, Director ______ -0- -0- ______
Richard K. Riederer, Director ______ -0- -0- ______
Joseph D. Strauss, Director ______ -0- -0- ______
Virginia L. Stringer, Director
& Chair ______ -0- -0- ______
James M. Wade, Director ______ -0- -0- ______
|
(1) Included in the Aggregate Compensation from Registrant are amounts deferred by Directors pursuant to the Deferred Compensation Plan discussed below. Pursuant to this Plan, compensation was deferred for the following directors: Roger A. Gibson, $_____; and Leonard W. Kedrowski, $_____.
(2) Included in the Total Compensation are amounts deferred for the following directors pursuant to the Deferred Compensation Plan: Roger A. Gibson, $_____; and Leonard W. Kedrowski, $_____.
SALES LOADS
Directors of the Funds and certain other Fund affiliates may purchase the Funds' Class A shares at net asset value without a sales charge. See the Class A share prospectuses for details.
CODE OF ETHICS
First American Investment Funds, Inc., FAF Advisors, Inc., and Quasar Distributors, LLC have each adopted a Code of Ethics pursuant to Rule 17j-1 of the 1940 Act. Each of these Codes of Ethics permits personnel to invest in securities for their own accounts, including securities that may be purchased or held by the Funds. These Codes of Ethics are on public file with, and are available from, the Securities and Exchange Commission.
PROXY VOTING POLICIES
The policies and procedures that the Funds use to determine how to vote proxies relating to their portfolio securities are set forth in Appendix B.
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS
INVESTMENT ADVISOR
FAF Advisors, Inc. (the "Advisor"), 800 Nicollet Mall, Minneapolis, Minnesota 55402, serves as the investment advisor and manager of the Funds. The Advisor is a wholly owned subsidiary of U.S. Bank National
Association ("U.S. Bank"), 800 Nicollet Mall, Minneapolis, Minnesota 55402, a national banking association that has professionally managed accounts for individuals, insurance companies, foundations, commingled accounts, trust funds, and others for over 75 years. U.S. Bank is a subsidiary of U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402, which is a regional multi-state bank holding company headquartered in Minneapolis, Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern states. U.S. Bancorp also has various other subsidiaries engaged in financial services. At June 30, 2006, U.S. Bancorp and its consolidated subsidiaries had consolidated assets of approximately $213 billion, consolidated deposits of $122 billion and shareholders' equity of $20.4 billion.
Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the "Advisory Agreement"), as amended, the Funds engaged U.S. Bank, through its First American Asset Management division ("FAAM"), to act as investment Advisor for, and to manage the investment of, the Funds' assets. The Advisory Agreement was assigned to the Advisor on May 2, 2001. The monthly fees paid to the Advisor are calculated on an annual basis based on each Fund's average daily net assets (before any waivers), as set forth in the table below:
FUND GROSS ADVISORY FEE % ---- -------------------- Core Bond Fund 0.50 High Income Bond Fund 0.70 Inflation Protected Securities Fund 0.50 Intermediate Government Bond Fund 0.50 Intermediate Term Bond Fund 0.50 Short Term Bond Fund 0.50 Total Return Bond Fund 0.60 U.S. Government Mortgage Fund 0.50 Arizona Tax Free Fund 0.50 California Intermediate Tax Free Fund 0.50 California Tax Free Fund 0.50 Colorado Intermediate Tax Free Fund 0.50 Colorado Tax Free Fund 0.50 Intermediate Tax Free Fund 0.50 Minnesota Intermediate Tax Free Fund 0.50 Minnesota Tax Free Fund 0.50 Missouri Tax Free Fund 0.50 Nebraska Tax Free Fund 0.50 Ohio Tax Free Fund 0.50 Oregon Intermediate Tax Free Fund 0.50 Short Tax Free Fund 0.50 Tax Free Fund 0.50 |
The Advisory Agreement requires the Advisor to arrange, if requested by FAIF, for officers or employees of the Advisor to serve without compensation from the Funds as directors, officers, or employees of FAIF if duly elected to such positions by the shareholders or directors of FAIF. The Advisor has the authority and responsibility to make and execute investment decisions for the Funds within the framework of the Funds' investment policies, subject to review by the Board of Directors of FAIF. The Advisor is also responsible for monitoring the performance of the various organizations providing services to the Funds, including the Funds' distributor, shareholder services agent, custodian, and accounting agent, and for periodically reporting to FAIF's Board of Directors on the performance of such organizations. The Advisor will, at its own expense, furnish the Funds with the necessary personnel, office facilities, and equipment to service the Funds' investments and to discharge its duties as investment advisor of the Funds.
In addition to the investment advisory fee, each Fund pays all of its expenses that are not expressly assumed by the Advisor or any other organization with which the Fund may enter into an agreement for the performance of services. Each Fund is liable for such nonrecurring expenses as may arise, including litigation to which the Fund may be a party. FAIF may have an obligation to indemnify its directors and officers with respect to such litigation. The Advisor will be liable to the Funds under the Advisory Agreement for any negligence or willful misconduct by the Advisor other than liability for investments made by the Advisor in accordance with the explicit direction of the Board of Directors or the investment objectives and policies of the Funds. The Advisor has agreed to indemnify the Funds with respect to any loss, liability, judgment, cost or penalty that a Fund may suffer due to a breach of the Advisory Agreement by the Advisor.
The Advisor may agree to a voluntary fee waiver for each of the Funds, which will be set forth in the Funds' Prospectuses. Any such fee waiver (or reimbursement) may be discontinued at any time. The Advisor also may absorb or reimburse expenses of the Funds from time to time, in its discretion, while retaining the ability to be reimbursed by the Funds for such amounts prior to the end of the fiscal year. This practice would have the effect of lowering a Fund's overall expense ratio and of increasing yield to investors, or the converse, at the time such amounts are absorbed or reimbursed, as the case may be.
The following table sets forth total advisory fees before waivers and after waivers for each of the Funds for the fiscal years ended September 30, 2004 and September 30, 2005, and the fiscal period ended June 30, 2006:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL PERIOD ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 JUNE 30, 2006
----------------------------- ----------------------------- -----------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE
FUND BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS
---- -------------- ------------- -------------- ------------- -------------- -------------
Core Bond Fund $10,397,487 $8,279,291 $9,589,647 $7,731,034 $_____ $_____
High Income Bond Fund 1,975,137 1,244,730 1,955,112 1,262,620 _____ _____
Inflation Protected Securities
Fund (1) * * 851,001 429,427 _____ _____
Intermediate Government Bond
Fund (2) 999,834 625,360 462,672 241,105 _____ _____
Intermediate Term Bond Fund 6,855,389 4,192,433 6,090,578 3,700,307 _____ _____
Short Term Bond Fund 5,356,650 3,250,185 4,629,727 2,792,901 _____ _____
Total Return Bond Fund 1,933,179 1,231,630 1,906,215 1,205,664 _____ _____
U.S. Government Mortgage Fund 1,315,094 1,035,024 1,045,505 778,959 _____ _____
Arizona Tax Free Fund 106,250 27,884 111,211 14,587 _____ _____
California Intermediate Tax
Free Fund 243,987 188,160 260,853 185,049 _____ _____
California Tax Free Fund 135,803 44,112 148,437 30,415 _____ _____
Colorado Intermediate Tax Free
Fund 297,609 230,918 253,564 179,438 _____ _____
Colorado Tax Free Fund 126,942 40,006 110,238 15,779 _____ _____
Intermediate Tax Free Fund 3,522,898 2,845,195 3,325,912 2,648,506 _____ _____
Minnesota Intermediate Tax
Free Fund 1,316,682 1,058,282 1,199,157 945,244 _____ _____
Minnesota Tax Free Fund 886,204 703,049 832,082 644,138 _____ _____
Missouri Tax Free Fund 935,310 745,050 904,784 702,403 _____ _____
Nebraska Tax Free Fund 176,909 58,406 192,813 49,742 _____ _____
Ohio Tax Free Fund 201,254 71,401 212,384 59,208 _____ _____
Oregon Intermediate Tax Free
Fund 736,986 588,360 714,799 550,596 _____ _____
Short Tax Free Fund (2) 2,1554,689 1,292,993 1,942,123 1,139,448 _____ _____
Tax Free Fund 2,405,813 1,927,250 2,329,572 1,833,061 _____ _____
|
* Fund was not in operation during this fiscal year.
(1) Commenced operations on October 1, 2004.
(2) Commenced operations on October 25, 2002.
ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to the sales charge payments and the distribution, service and transfer agency fees described in the prospectus and elsewhere in this Statement of Additional Information, the Advisor and/or the Distributor may make additional payments out of its own assets to selected institutions that sell shares of First American Funds (such as brokers, dealers, banks, registered investment advisors, retirement plan administrators and other institutions; hereinafter "Institutions") under the categories described below for the purposes of promoting the sale of Fund shares, maintaining share balances and/or for sub-accounting, administrative or shareholder processing services.
The amounts of these payments could be significant and may create an incentive for an Institution or its representatives to recommend or offer shares of the Funds or other First American Funds to its customers. The Institution may elevate the prominence or profile of the Funds within the Institution's organization by, for example, placement on a list of preferred or recommended funds, and/or granting the Advisor and/or the Distributor preferential or enhanced opportunities to promote the Funds in various ways within the Institution's organization.
These payments are made pursuant to agreements with Institutions and do not change the price paid by investors for the purchase of a share or the amount a Fund will receive as proceeds from such sales. Furthermore, these payments are not reflected in the fees and expenses listed in the fee table section of the Funds' prospectuses and described above because they are not paid by the Funds.
The categories of payments described below are not mutually exclusive, and a single Institution may receive payments under all categories.
Marketing Support Payments and Program Servicing Payments
The Advisor and/or the Distributor may make payments for marketing support and/or program servicing to certain Institutions that are registered as holders or dealers of record for accounts in one or more of the First American Funds, or certain Institutions that sell First American Fund shares through retirement plans and other investment programs to compensate them for a variety of services they provide to such programs.
Marketing Support Payments. Services for which an Institution receives marketing support payments may include business planning assistance, advertising, educating the Institution's personnel about the First American Funds and shareholder financial planning needs, placement on the Institution's preferred or recommended fund company list, and access to sales meetings, sales representatives and management representatives of the Institution. In addition, Institutions may be compensated for enabling Fund representatives to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other events sponsored by the Institution. The Advisor and/or the Distributor compensates Institutions differently depending upon, among other factors, sales and assets levels, redemption rates, ability to attract and retain assets, reputation in the industry and the level and/or type of marketing assistance and educational activities provided by the Institution.
Marketing support payments typically apply to retail sales and assets but may apply to other specific types of sales or assets, such as to retirement plans or fee-based advisory programs, in certain situations. The payments are negotiated and may be based on such factors as the number or value of shares that the Institution sells or may sell, the value of the assets invested in the Funds by the Institution's customers and/or other measures as determined from time to time by the Advisor and/or the Distributor. In addition, payments may include the reimbursement of ticket or operational charges (fees that an Institution charges its representatives for effecting transactions in Fund shares) and/or the payment of a lump sum for services provided.
Program Servicing Payments. Services for which an Institution receives program servicing payments typically include recordkeeping, reporting, or transaction processing, but may also include services rendered in connection with Fund/investment selection and monitoring, employee enrollment and education, plan balance rollover or separation, or other similar services. An Institution may perform program services itself or may arrange with a third party to perform program services.
Program servicing payments typically apply to retirement plans or fee-based advisory programs but may apply to retail sales and assets, in certain situations. The payments are negotiated and are based on such factors as the type and nature of services or support furnished by the Institution. In addition, payments may include the reimbursement of ticket or operational charges (fees that an Institution charges its representatives for effecting transactions in Fund shares) and/or the payment of a lump sum for services provided.
The Advisor and/or the Distributor may make one-time or periodic payments to selected Institutions receiving program servicing payments to reimburse printing costs for literature for participants, for account maintenance, for ticket charges of up to $25 per purchase or exchange order placed by an Institution, or for the establishment of First American Funds on the Institution's trading system. In addition, the Advisor and/or the Distributor, at the direction of a retirement plan's sponsor, may reimburse or pay direct expenses of the plan that would otherwise be payable by the plan. These payments may cause the aggregate amount of the payments to an Institution on an annual basis to exceed the basis point amount set forth below.
Except as described in the foregoing paragraph, in the case of any one Institution, marketing support and program servicing payments are not expected, with certain limited exceptions, to exceed, in the aggregate, 0.35% of the average net assets of Fund shares attributable to that Institution on an annual basis.
Other Payments
From time to time, the Advisor and/or the Distributor, at its expense, may provide compensation to Institutions that sell or arrange for the sale of shares of the Fund(s), in addition to marketing support and program servicing payments described above. When not provided for in a marketing support or program servicing agreement, the Advisor and/or the Distributor may pay Institutions for enabling the Advisor and/or the Distributor to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other Institution employees, client and investor events and other Institution-sponsored events, and for travel expenses, including lodging incurred by registered representatives and other employees in connection with prospecting, asset retention and due diligence trips. These payments may vary depending upon the nature of the event. The Advisor and/or the Distributor makes payments for such events as it deems appropriate, subject to its internal guidelines and applicable law.
The Advisor and/or the Distributor occasionally sponsors due diligence meetings for registered representatives during which they receive updates on various First American Funds and are afforded the opportunity to speak with portfolio managers. Invitations to these meetings are not conditioned on selling a specific number of shares. Those who have shown an interest in First American Funds, however, are more likely to be considered. To the extent permitted by their firm's policies and procedures, registered representatives' expenses in attending these meetings may be covered by the Advisor and/or the Distributor.
Certain employees of the Advisor and its affiliates may receive cash compensation from the Advisor and/or the Distributor in connection with establishing new client relationships with the First American Funds. The total compensation of employees who have marketing and/or sales responsibilities is based in part on their generation of new client relationships, including new client relationships with the First American Funds. Other employees of the Advisor and its affiliates may receive a one-time referral fee from the Advisor and/or the Distributor for new business to the First American Funds based on a percentage of the annual revenue generated by the new client relationship. Such compensation will not exceed 10% of the annual revenue generated, up to a maximum of $10,000.
Other compensation may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as the NASD. Investors can ask their Institution for information about any payments it receives from the Advisor and/or the Distributor and the services it provides for those payments.
Investors may wish to take such payment arrangements into account when considering and evaluating any recommendations relating to Fund shares.
Institutions Receiving Additional Payments
The following is a list of Institutions receiving one or more of the types of payments discussed above as of March 16, 2006:
401(k) Investment Services, Inc.
A.G. Edwards & Sons, Inc.
American Stock Transfer & Trust Company
Ameriprise Financial Services, Inc.
Bisys Retirement Services, Inc.
Ceridian Corporation
Charles Schwab & Co., Inc.
Citigroup Global Markets Inc.
City National Bank
Commonwealth Equity Services, LLP, DBA Commonwealth Financial Network
Country Capital Management Company
CPI Qualified Plan Consultants, Inc.
Dyatech, LLC
ExpertPlan, Inc.
Fidelity Investments Institutional Operations Company
Fintegra, LLC
Hewitt Associates LLC
J.P. Morgan Retirement Plan Services, LLC
Linsco/Private Ledger Corp.
McDonald Investments, Inc.
Mercer HR Outsourcing LLC
Merrill Lynch, Pierce, Fenner & Smith Inc.
MetLife Securities, Inc.
Metropolitan Life Insurance Company
Mid Atlantic Capital Corporation
Milliman & Robertson, Inc.
Morgan Stanley DW Inc
MSCS Financial Services, LLC
National Financial Services LLC
National Investor Services Corp.
National Planning Holdings, Inc.
Pershing LLC
Piper Jaffray & Company
Raymond James & Associates
Raymond James Financial Services, Inc.
RBC Dain Rauscher, Inc.
Robert W. Baird & Co., Inc.
Stanton Trust Company N.A.
Stifel, Nicolaus & Co., Inc.
Sungard Financial Networks
Symetra Life Insurance Company
TD Waterhouse Investor Services, Inc.
The Prudential Insurance Company of America
The Retirement Plan Company, LLC
UBS Financial Services, Inc.
Unified Trust, N.A.
U.S. Bancorp Investments, Inc.
U.S. Bank, N.A.
Wachovia Bank, N.A.
Wells Fargo Bank, N.A.
Any additions, modification or deletions to the list of Institutions identified above that have occurred since September 30, 2006 are not reflected.
ADMINISTRATOR
FAF Advisors, Inc. (the "Administrator") serves as Administrator pursuant to an Administration Agreement between the Administrator and the Funds, dated July 1, 2005. Under the Administration Agreement, the Administrator provides, or compensates others to provide, services to the Funds. These services include various oversight and legal services, accounting services and shareholder services. The Funds pay the Administrator fees which are calculated daily and paid monthly, equal to each Fund's pro rata share of an amount equal, on an annual basis, to 0.15% of the aggregate average daily net assets of all open-end mutual funds in the First American fund family up to $8 billion, 0.135% on the next $17 billion of aggregate average daily net assets, 0.12% on the next $25 billion of aggregate average daily net assets, and 0.10% of the aggregate average daily net assets in excess of $50 billion. The Administrator pays a portion of such fees to U.S. Bancorp Fund Services, LLC ("USBFS"), 615 East Michigan Street, Milwaukee, WI 53202, pursuant to a Sub-Administration Agreement dated July 1, 2005 whereby USBFS provides various Sub-Administration services. USBFS is a subsidiary of U.S. Bancorp.
Prior to July 1, 2005, the Administrator and USBFS acted as Co-Administrators pursuant to a Co-Administration Agreement among the Funds, the Administrator and USBFS. The services provided by, and fees paid to, USBFS pursuant to the Co-Administration Agreement included transfer agency fees and services. As of July 1, 2005, transfer agency services and fees paid to USBFS are covered in a separate Transfer Agency and Shareholder Servicing Agreement between USBFS and the Funds. Under the Co-Administration Agreement the Funds paid the Administrator and USBFS fees which were calculated daily and paid monthly, equal to each Fund's pro rata share of an amount equal, on an annual basis, to 0.25% of the aggregate average daily net assets of all open-end mutual funds in the First American fund family up to $8 billion, 0.235% on the next $17 billion of aggregate average daily net assets, 0.22% on the next $25 billion of aggregate average daily net assets, and 0.20% of the aggregate average daily net assets of all open-end mutual funds in the First American fund family in excess of $50 billion. (For the purposes of the Co-Administration Agreement, the First American fund family included all series of FAF, FASF and FAIF.) In addition, the Funds paid annual fees of $18,500 per CUSIP, shareholder account maintenance fees of $9 to $15 per account, closed account fees of $3.50 per account, and Individual Retirement Account fees of $15 per account.
The following table sets forth total administrative fees (including fees paid to USBFS through June 30, 2005 for transfer agency services provided under the Co-Administration Agreement), after waivers, paid by each of the Funds listed below to the Administrator and USBFS for the fiscal years ended September 30, 2004 and September 30, 2005, and the fiscal period ended June 30, 2006:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL PERIOD ENDED
FUND SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 JUNE 30, 2006
---- ------------------ ------------------ -------------------
Core Bond Fund $5,473,804 $4,411,938 $_____
High Income Bond Fund 743,582 648,863 _____
Inflation Protected Securities
Fund (1) * 362,827 _____
Intermediate Government Bond
Fund (2) 524,762 218,397 _____
Intermediate Term Bond Fund 3,609,652 2,825,698 _____
Short Term Bond Fund 2,821,891 2,179,352 _____
Total Return Bond Fund 727,212 647,144 _____
U.S. Government Mortgage Fund 692,085 483,435 _____
Arizona Tax Free Fund 55,939 50,403 _____
California Intermediate Tax
Free Fund 128,523 119,799 _____
California Tax Free Fund 71,523 67,124 _____
Colorado Intermediate Tax Free
Fund 156,589 117,264 _____
Colorado Tax Free Fund 66,827 51,194 _____
Intermediate Tax Free Fund 1,854,990 1,529,007 _____
Minnesota Intermediate Tax
Free Fund 693,351 554,596 _____
Minnesota Tax Free Fund 466,617 383,241 _____
Missouri Tax Free Fund 492,461 415,797 _____
Nebraska Tax Free Fund 93,196 88,360 _____
Ohio Tax Free Fund 105,997 97,493 _____
Oregon Intermediate Tax Free
Fund 388,110 329,060 _____
Short Tax Free Fund (2) 1,136,738 906,393 _____
Tax Free Fund 1,266,721 1,069,058 _____
|
(1) Commenced operations on October 1, 2004.
(2) Commenced operations on October 25, 2002.
TRANSFER AGENT
USBFS serves as the Funds' transfer agent pursuant to a Transfer Agency and Shareholder Servicing Agreement between USBFS and the Funds dated July 1, 2005. Pursuant to the Transfer Agency and Shareholder Servicing Agreement, the Funds pay $18,500 per share class and additional per account fees for transfer agent services. The Funds also pay a fee equal, on an annual basis, to 0.10% of each Fund's average daily net assets as compensation for providing certain shareholder services and to reimburse USBFS for its payments to institutions with which it has contracted to establish and service omnibus accounts. In addition, USBFS is reimbursed for its out-of-pocket expenses incurred while providing its services to the Funds.
The following table sets forth transfer agent fees paid by the Funds to USBFS for the fiscal period July 1 to September 30, 2005 and the fiscal period ended June 30, 2006:
FISCAL PERIOD ENDED FISCAL PERIOD ENDED
FUND SEPTEMBER 30, 2005 JUNE 30, 2006
---- ------------------- -------------------
Core Bond Fund $657,271 $_____
High Income Bond Fund 88,869 _____
Inflation Protected Securities
Fund 87,778 _____
Intermediate Government Bond
Fund 25,677 _____
Intermediate Term Bond Fund 392,846 _____
Short Term Bond Fund 265,489 _____
Total Return Bond Fund 100,870 _____
U.S. Government Mortgage Fund 69,086 _____
Arizona Tax Free Fund 8,421 _____
California Intermediate Tax
Free Fund 18,133 _____
California Tax Free Fund 11,406 _____
Colorado Intermediate Tax Free
Fund 16,759 _____
Colorado Tax Free Fund 7,053 _____
Intermediate Tax Free Fund 229,291 _____
Minnesota Intermediate Tax
Free Fund 79,144 _____
Minnesota Tax Free Fund 56,618 _____
Missouri Tax Free Fund 62,540 _____
Nebraska Tax Free Fund 13,604 _____
Ohio Tax Free Fund 14,807 _____
Oregon Intermediate Tax Free
Fund 48,791 _____
Short Tax Free Fund 119,633 _____
Tax Free Fund 162,650 _____
|
DISTRIBUTOR
Quasar Distributors, LLC ("Quasar" or the "Distributor") serves as the distributor for the Funds' shares pursuant to a Distribution Agreement dated July 1, 2005 (the "Distribution Agreement") The Distributor is a wholly owned subsidiary of U.S. Bancorp.
Fund shares and other securities distributed by the Distributor are not deposits or obligations of, or endorsed or guaranteed by, U.S. Bank or its affiliates, and are not insured by the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.
Under the Distribution Agreement, the Funds have granted to the Distributor the exclusive right to sell shares of the Funds as agent and on behalf of the Funds. The Distributor pays compensation pursuant to the Distribution Agreement to securities firms, financial institutions (including, without limitation, banks) and other industry professionals (the "Participating Institutions") which enter into sales agreements with the Distributor. U.S. Bancorp Investment Services, Inc. ("USBI"), a broker-dealer affiliated with the Advisor, and U.S. Bank, are Participating Institutions.
The Class A Shares pay to the Distributor a shareholder servicing fee at an annual rate of 0.25% of the average daily net assets of the Class A Shares. The fee may be used by the Distributor to provide compensation for shareholder servicing activities with respect to the 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. This fee is calculated and paid each month based on average daily net assets of Class A Shares each Fund for that month.
The Class B Shares pay to the Distributor a shareholder servicing fee at the annual rate of 0.25% of the average daily net assets of the Class B Shares. The fee may be used by the Distributor to provide compensation for shareholder servicing activities with respect to the Class B Shares beginning one year after purchase. The Class B Shares also pay to the Distributor a distribution fee at the annual rate of 0.75% of the average daily net assets of the Class B Shares. The distribution fee is intended to compensate the distributor for advancing a commission to institutions purchasing Class B Shares.
The Class C Shares pay to the Distributor a shareholder servicing fee at the annual rate of 0.25% of the average daily net assets of the Class C Shares. The fee may be used by the Distributor to provide compensation for shareholder servicing activities with respect to the Class C Shares. This fee is calculated and paid each month based on average daily net assets of the Class C Shares. The Class C Shares also pay to the Distributor a distribution fee at the annual rate of 0.75% of the average daily net assets of the Class C Shares. The Distributor may use the distribution fee to provide compensation to institutions through which shareholders hold their shares beginning one year after purchase.
The Class R Shares pay to the Distributor a distribution fee at the annual rate of 0.50% of the average daily net assets of Class R Shares. The fee may be used by the Distributor to provide initial and ongoing sales compensation to its investment executives and to Participating Institutions in connection with sales of Class R Shares and to pay for advertising and other promotional expenses in connection with the distribution of Class R shares. This fee is calculated and paid each month based on average daily net assets of the Class R Shares.
The Distributor receives no compensation for distribution of the Class Y Shares.
The Distribution Agreement provides that it will continue in effect for a period of more than one year from the date of its 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 Distribution and Service Plan or in any agreement related to such plan.
The following tables set forth the amount of underwriting commissions paid by certain Funds and the amount of such commissions retained by Quasar, during the fiscal years ended September 30, 2004 and September 30, 2005, and the fiscal period ended June 30, 2006:
TOTAL UNDERWRITING COMMISSIONS
FISCAL FISCAL FISCAL
YEAR YEAR PERIOD
ENDED ENDED ENDED
SEPTEMBER SEPTEMBER JUNE
FUND 30, 2004 30, 2005 30, 2006
---- --------- --------- --------
Core Bond Fund $231,211 $113,366 $____
High Income Bond Fund 123,393 80,031 ____
Inflation Protected Securities
Fund (1) * 141,133 ____
Intermediate Government Bond
Fund (2) 3,579 16,765 ____
Intermediate Term Bond Fund 63,980 30,413 ____
Short Term Bond Fund 136,420 42,687 ____
Total Return Bond Fund 77,286 35,383 ____
U.S. Government Mortgage Fund 86,343 78,171 ____
Arizona Tax Free Fund 25,979 4,827 ____
California Intermediate Tax
Free Fund 20,011 21,788 ____
California Tax Free Fund 45,356 52,675 ____
Colorado Intermediate Tax Free
Fund 38,569 26,885 ____
Colorado Tax Free Fund 21,237 9,331 ____
Intermediate Tax Free Fund 22,352 12,581 ____
Minnesota Intermediate Tax
Free Fund 107,669 62,004 ____
Minnesota Tax Free Fund 85,748 243,346 ____
Missouri Tax Free Fund 60,845 57,868 ____
Nebraska Tax Free Fund 67,116 24,069 ____
Ohio Tax Free Fund 24,187 6,620 ____
Oregon Intermediate Tax Free
Fund 30,543 28,714 ____
Short Tax Free Fund (2) 17,522 7,124 ____
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FISCAL FISCAL FISCAL
YEAR YEAR PERIOD
ENDED ENDED ENDED
SEPTEMBER SEPTEMBER JUNE
FUND 30, 2004 30, 2005 30, 2006
---- --------- --------- --------
Tax Free Fund 118,133 42,426
|
(1) Commenced operations October 1, 2004.
(2) Commenced operations on October 25, 2002.
UNDERWRITING COMMISSIONS RETAINED BY QUASAR
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL PERIOD ENDED
FUND SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 JUNE 30, 2006
---- ------------------ ------------------ -------------------
Core Bond Fund $15,481 $ 8,100 $____
High Income Bond Fund 5,461 5,542 ____
Inflation Protected Securities
Fund (1) * 17,297 ____
Intermediate Government Bond
Fund (2) 565 2,762 ____
Intermediate Term Bond Fund 9,141 5,090 ____
Short Term Bond Fund 38,498 8,896 ____
Total Return Bond Fund 5,126 2,465 ____
U.S. Government Mortgage Fund 5,312 6,935 ____
Arizona Tax Free Fund 2,058 289 ____
California Intermediate Tax
Free Fund 3,196 3,027 ____
California Tax Free Fund 4,226 3,688
Colorado Intermediate Tax Free
Fund 5,258 3,848 ____
Colorado Tax Free Fund 2,167 977 ____
Intermediate Tax Free Fund 3,244 2,089 ____
Minnesota Intermediate Tax
Free Fund 15,098 9,038 ____
Minnesota Tax Free Fund 6,237 44,160 ____
|
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL PERIOD ENDED
FUND SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 JUNE 30, 2006
--- ------------------ ------------------ -------------------
Missouri Tax Free Fund $ 660 $4,542 $____
Nebraska Tax Free Fund 4,981 2,563 ____
Ohio Tax Free Fund 1,517 576 ____
Oregon Intermediate Tax Free
Fund 4,630 4,509 ____
Short Tax Free Fund (2) 3,367 1,203 ____
Tax Free Fund 9,949 3,528 ____
|
(1) Commenced operations October 1, 2004.
(2) Commenced operations on October 25, 2002.
The Distributor received the following compensation from the Funds during the Funds' most recent fiscal period ended June 30, 2006:
NET UNDERWRITING COMPENSATION ON
DISCOUNTS AND REDEMPTIONS AND BROKERAGE OTHER
COMMISSIONS REPURCHASES COMMISSIONS COMPENSATION*
---------------- --------------- ----------- -------------
Core Bond Fund -- --
High Income Bond Fund -- --
Inflation Protected Securities
Fund
Intermediate Government Bond
Fund -- --
Intermediate Term Bond Fund -- --
Short Term Bond Fund -- --
Total Return Bond Fund -- --
U.S. Government Mortgage Fund -- --
Arizona Tax Free Fund --
California Intermediate Tax
Free Fund -- --
California Tax Free Fund -- --
Colorado Intermediate Tax
Free Fund -- --
Colorado Tax Free Fund -- --
Intermediate Tax Free Fund -- --
Minnesota Intermediate Tax
Free Fund -- --
Minnesota Tax Free Fund -- --
Missouri Tax Free Fund -- --
Nebraska Tax Free Fund -- --
Ohio Tax Free Fund -- --
Oregon Intermediate Tax Free
Fund -- --
Short Tax Free Fund -- --
Tax Free Fund -- --
|
* As disclosed below, the Funds also paid fees to the Distributor under FAIF's Rule 12b-1 Distribution and Service Plan. None of those fees were retained by the Distributor. The Distributor is compensated under a separate arrangement from fees earned by U.S. Bancorp Fund Services, LLC, as part of the Sub-Administration Agreement between FAF Advisors and U.S. Bancorp Fund Services, LLC.
Prior to June 30, 2004, the Class R Shares were designated Class S Shares. FAIF had entered into a Shareholder Service Plan and Agreement with the Distributor with respect to the Class S Shares (the "Class S Shareholder Service Plan and Agreement"), under which the Distributor had agreed to provide FAIF, or enter into written agreements with other service providers pursuant to which the service providers would provide FAIF, one or more specified shareholder services to beneficial owners of Class S Shares. Pursuant to the Class S Shareholder Service Plan and Agreement, the Funds paid the Distributor a fee at an annual rate of 0.25% of the average net asset value of the Class S Shares, computed daily and paid monthly. The Distributor paid shareholder service providers with which it had entered into written agreements out of this amount.
The total shareholder servicing fees, after waivers, paid by Class S Shares of the Funds listed below to the Distributor for the fiscal year ended September 30, 2004:
Core Bond Fund $53,878 High Income Bond Fund 986 Intermediate Government Bond Fund * Intermediate Term Bond Fund 11,147 Short Term Bond Fund 7,153 Total Return Bond Fund 3,228 U.S. Government Mortgage Fund 21,251 Arizona Tax Free Fund * California Intermediate Tax Free Fund * California Tax Free Fund * Colorado Intermediate Tax Free Fund * Colorado Tax Free Fund * Intermediate Tax Free Fund * Minnesota Intermediate Tax Free Fund * Minnesota Tax Free Fund * Missouri Tax Free Fund * Nebraska Tax Free Fund * Ohio Tax Free Fund * Oregon Intermediate Tax Free Fund * Short Tax Free Fund * Tax Free Fund * |
FAIF has also adopted a Distribution and Service Plan with respect to the Class A, Class B, Class C and Class R Shares of the Funds pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). 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 Plan authorizes the Distributor to retain the sales charges paid upon purchase of Class A, Class B and Class C Shares and authorize the Funds to pay the Distributor distribution and/or shareholder servicing fees. The Plan is a "compensation-type" plan under which the Distributor is entitled to receive the distribution and shareholder servicing fees regardless of whether its actual distribution and shareholder servicing expenses are more or less than the amount of the fees. The distribution fees under the Plan are used for primary purpose of compensating broker-dealers for their sales of the Funds. The shareholder servicing fees are used primarily for the purpose of providing compensation for the ongoing servicing and/or maintenance of shareholder accounts. The Plan authorizes the Distributor to retain the contingent deferred sales charge applied on redemptions of Class B and C Shares, except that portion which is reallowed to Participating Institutions. The Plan recognizes that the Distributor and the Advisor, in their discretion, may from time to time use their own assets to pay for certain additional costs of distributing Class A, Class B, Class C and Class R Shares. Any such arrangements to pay such additional costs may be commenced or discontinued by the Distributor or the Advisor at any time.
The following table sets forth the total Rule 12b-1 fees, after waivers, paid by certain of the Funds for the fiscal period ended June 30, 2006 with respect to the Class A shares, Class B shares, Class C shares and Class R shares of the Funds. As noted above, no distribution fees are paid with respect to Class Y shares.
FISCAL PERIOD ENDED JUNE 30, 2006
RULE 12B-1 FEES
-------------------------------------
CLASS A CLASS B CLASS C CLASS R
FUND SHARES SHARES SHARES SHARES
---- ------- ------- ------- -------
Core Bond Fund
High Income Bond Fund
Inflation Protected Securities
Fund (1)
Intermediate Government Bond
Fund (2)
Intermediate Term Bond Fund
Short Term Bond Fund
Total Return Bond Fund
U.S. Government Mortgage Fund
Arizona Tax Free Fund
California Intermediate Tax
Free Fund
California Tax Free Fund
Colorado Intermediate Tax Free
Fund
Colorado Tax Free Fund
Intermediate Tax Free Fund
Minnesota Intermediate Tax
Free Fund
Minnesota Tax Free Fund
Missouri Tax Free Fund
Nebraska Tax Free Fund
Ohio Tax Free Fund
Oregon Intermediate Tax Free
Fund
|
FISCAL PERIOD ENDED JUNE 30, 2006
RULE 12B-1 FEES
-------------------------------------
CLASS A CLASS B CLASS C CLASS R
FUND SHARES SHARES SHARES SHARES
---- ------- ------- ------- -------
Short Tax Free Fund (2)
Tax Free Fund
|
(1) Commenced operations October 1, 2004.
(2) Commenced operations on October 25, 2002.
The following table sets forth the Rule 12b-1 fees the Distributor paid to Participating Institutions for the fiscal period ended June 30, 2006 with respect to the Class A shares, Class B shares, Class C shares and Class R shares of the Funds.
FISCAL PERIOD ENDED JUNE 30, 2006
--------------------------------------
CLASS A CLASS B CLASS C CLASS R
FUND SHARES SHARES SHARES SHARES
---- ------- ------- ------- -------
Core Bond Fund
High Income Bond Fund
Inflation Protected Securities
Fund *
Intermediate Government Bond
Fund * * *
Intermediate Term Bond Fund * * *
Short Term Bond Fund * * *
Total Return Bond Fund
U.S. Government Mortgage Fund
Arizona Tax Free Fund * *
California Intermediate Tax
Free Fund * * *
California Tax Free Fund * *
Colorado Intermediate Tax
Free Fund * * *
Colorado Tax Free Fund * *
Intermediate Tax Free Fund * * *
Minnesota Intermediate Tax
Free Fund * * *
Minnesota Tax Free Fund * *
Missouri Tax Free Fund * *
Nebraska Tax Free Fund * *
Ohio Tax Free Fund * *
Oregon Intermediate Tax Free
Fund * * *
Short Tax Free Fund * * *
Tax Free Fund * *
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CUSTODIANS AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Custodians. U.S. Bank, 415 Walnut Street, Cincinnati, OH 45202, acts as the custodian for each Fund other than International Fund. State Street Bank and Trust Company, 2 Avenue de Lafayette, LCC/5 Boston, MA 02111, acts as the custodian for International Fund. U.S. Bank is a subsidiary of U.S. Bancorp. The custodians take 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 are held by their respective custodian or, for International Fund, by a sub-custodian. The custodian or sub-custodian delivers securities against payment upon sale and pays for securities against delivery upon purchase. The Custodians also remit 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 as custodian to the Funds other than International Fund, U.S. Bank is paid a monthly fee calculated on an annual basis equal to 0.005% of each such Funds' average daily net assets. State Street Bank and Trust Company, as custodian for the International Fund, is paid reasonable compensation as agreed upon from time to time. Sub-custodian fees with respect to International Fund are paid by State Street Bank and Trust Company out of its fees from such Fund. In addition, the custodians are reimbursed for their out-of-pocket expenses incurred while providing services to the Funds. The custodians continue to serve so long as their 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.
Independent Registered Public Accounting Firm. Ernst & Young LLP, 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, serves as the Funds' independent registered public accounting firm, providing audit services, including audits of the annual financial statements.
PORTFOLIO MANAGERS
COMPENSATION
Portfolio manager compensation consists primarily of base pay, an annual cash incentive and long term incentive payments.
Base pay is determined based upon an analysis of the portfolio manager's general performance, experience, and market levels of base pay for such position.
Portfolio managers are paid an annual incentive based upon investment performance, generally over the past one- and three-year periods unless the portfolio manager's tenure is shorter. The maximum potential annual cash incentive is equal to a multiple of base pay, determined based upon the particular portfolio manager's performance and experience, and market levels of base pay for such position.
For managers of the Bond Funds, the portion of the maximum potential annual
cash incentive that is paid out is based upon performance relative to the
portfolio's benchmark and performance relative to an appropriate Lipper industry
peer group. Generally, the threshold for payment of an annual cash incentive is
(i) benchmark performance and (ii) median performance versus the peer group, and
the maximum annual cash incentive is attained at (i) a spread over the benchmark
which the Advisor believes will, over time, deliver top quartile performance and
(ii) top quartile performance versus the Lipper industry peer group.
For managers of the Tax Free Funds, the portion of the maximum potential annual cash incentive that is paid out is based upon performance relative to an appropriate Lipper industry peer group, and for certain portfolio managers is also based on a subjective component. Generally, the threshold for payment of an annual cash incentive is median performance versus the peer group, and the maximum annual cash incentive is attained at top quartile performance versus the Lipper industry peer group.
Investment performance is measured on a pre-tax basis, gross of fees for Fund results and for the Lipper industry peer group.
Long term incentive payments are paid to portfolio managers on an annual
basis based upon general performance and expected contributions to the success
of the Advisor. Long-term incentive payments are comprised of two components:
(i) phantom equity units of the Advisor and (ii) U.S. Bancorp options and
restricted stock.
There are generally no differences between the methods used to determine compensation with respect to the Funds and the Other Accounts shown in the table below.
The following table sets forth the number and total assets of the mutual funds and accounts managed by the Funds' managers as of June 30, 2006.
AMOUNT SUBJECT
TO
NUMBER OF PERFORMANCE-
PORTFOLIO MANAGER TYPE OF ACCOUNT MANAGED ACCOUNTS ASSETS BASED FEE
----------------- -------------------------------- --------- ------ --------------
Christopher L. Drahn Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Jeffrey J. Ebert Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
John T. Fruit Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Michael S. Hamilton Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Gregory A. Hanson Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Douglas P. Hedberg Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Wan-Chong Kung Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Chris J. Neuharth Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Marie A. Newcome Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Jason J. O'Brien Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Timothy A. Palmer Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Linda M. Sauber Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Catherine M. Stienstra Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
Douglas J. White Registered Investment Company
Other Pooled Investment Vehicles
Other Accounts
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The Funds' portfolio managers often manage multiple accounts. The Advisor has adopted policies and procedures regarding brokerage and trade allocation and allocation of investment opportunities that it believes are reasonably designed to address potential conflicts of interest associated with managing multiple accounts for multiple clients.
OWNERSHIP
The following table indicates as of June 30, 2006 the value, within the indicated range, of shares beneficially owned by the portfolio managers in each Fund they manage. For purposes of this table, the following letters indicate the range listed next to each letter:
A - $0
B - $1 - $10,000
C - $10,001 - $50,000
D - $50,001 - $100,000
E - $100,001 - $500,000
F - $500,001 - $1,000,000
G - More than $1 million
OWNERSHIP
IN FUND
PORTFOLIO MANAGER FUND OWNERSHIP IN FUND COMPLEX
----------------- ------------------------------------- ----------------- --------
Christopher L. Drahn California Intermediate Tax Free Fund
California Tax Free Fund
Colorado Intermediate Tax Free Fund
Colorado Tax Free Fund
Intermediate Tax Free Fund
Minnesota Intermediate Tax Free Fund
Minnesota Tax Free Fund
Missouri Tax Free Fund
Nebraska Tax Free Fund
Ohio Tax Free Fund
Oregon Intermediate Tax Free Fund
Short Tax Free Fund
Jeffrey J. Ebert Intermediate Term Bond Fund
Total Return Bond Fund
John T. Fruit High Income Bond Fund
Michael S. Hamilton California Intermediate Tax Free Fund
California Tax Free Fund
Ohio Tax Free Fund
Oregon Intermediate Tax Free Fund
Gregory A. Hanson High Income Bond Fund
Douglas P. Hedberg High Income Bond Fund
Wan-Chong Kung Core Bond Fund
Inflation Protected Securities Fund
Intermediate Government Bond Fund
Intermediate Term Bond Fund
Total Return Bond Fund
Chris J. Neuharth Core Bond Fund
Short Term Bond Fund
Total Return Bond Fund
|
OWNERSHIP
IN FUND
PORTFOLIO MANAGER FUND OWNERSHIP IN FUND COMPLEX
----------------- ------------------------------------- ----------------- --------
U.S. Government Mortgage Fund
Marie A. Newcome Short Term Bond Fund
Jason J. O'Brien U.S. Government Mortgage Fund
Timothy A. Palmer Core Bond Fund
Total Return Bond Fund
Linda M. Sauber Inflation Protected Securities Fund
Intermediate Government Bond Fund
Catherine M. Stienstra Arizona Tax Free Fund
Colorado Intermediate Tax Free Fund
Colorado Tax Free Fund
Intermediate Tax Free Fund
Nebraska Tax Free Fund
Short Tax Free Fund
Tax Free Fund
Douglas J. White Arizona Tax Free Fund
Minnesota Intermediate Tax Free Fund
Minnesota Tax Free Fund
Missouri Tax Free Fund
Tax Free Fund
|
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to which securities are to be bought or sold, the total amount of securities to be bought or sold, the broker-dealer with or through which the securities transactions are to be effected and the commission rates applicable to the trades are made by the Advisor.
In selecting a broker-dealer to execute securities transactions, the Advisor considers a variety of factors, including the execution capability, financial responsibility and responsiveness of the broker-dealer in seeking best price and execution. Subject to the satisfaction of its obligation to seek best execution, other factors the Advisor may consider include a broker-dealer's access to initial public offerings and the nature and quality of any brokerage and research products and services the broker-dealer provides. However, the Advisor may cause the Funds to pay a broker-dealer a commission in excess of that which another broker-dealer might have charged for effecting the same transaction (a practice commonly referred to as "paying up"). However, the Advisor may cause the Funds to pay up in recognition of the value of brokerage and research products and services provided to the Advisor by the broker-dealer. The broker-dealer may directly provide such products or services to the Advisor or purchase them form a third party and provide them to the Advisor. In such cases, the Funds are in effect paying for the brokerage and research products and services in so-called "soft-dollars". However, the Advisor will authorize the Funds to pay an amount of commission for effecting a securities transaction in excess of the amount of commission another broker or dealer would have charged only if the Advisor determined in good faith that the amount of such commission was reasonable in relation to the value of the brokerage and research products and services provided by such broker or dealer, viewed in terms of either that particular transaction or the overall responsibilities of the Advisor with respect to the managing its accounts.
The types of research products and services the Advisor receives include economic analysis and forecasts, financial market analysis and forecasts, industry and company specific analysis, interest rate forecasts, and other services that assist in the investment decision making process. Research products and services are received primarily in the form of written reports, computer-generated services, telephone contacts and personal meetings with security analysts. Research services may also be provided in the form of meetings arranged with corporate and industry spokespersons or may be generated by third parties but are provided to the Advisor by, or through, broker-dealers.
The research products and services the Advisor receives from broker-dealers are supplemental to, and do not necessarily reduce, the Advisor's own normal research activities. As a practical matter, however, it would be impossible for the Advisor to generate all of the information presently provided by broker-dealers. The expenses of the Advisor would be materially increased if they attempted to generate such additional information through their own
staffs. To the extent that the Advisor could use cash to purchase many of the brokerage and research products and services received for allocating securities transactions to broker-dealers, the Advisor are relieved of expenses that they might otherwise bear when such services are provided by broker-dealers.
As a general matter, the brokerage and research products and services the Advisor receive from broker-dealers are used to service all of their respective accounts. However, any particular brokerage and research product or service may not be used to service each and every client account, and may not benefit the particular accounts that generated the brokerage commissions. For example, equity commissions may pay for brokerage and research products and services utilized in managing fixed income accounts.
In some cases, the Advisor may receive brokerage or research products or services that are used for both brokerage or research purposes and other purposes, such as accounting, record keeping, administration or marketing. In such cases, the Advisor will make a good faith effort to decide the relative proportion of the cost of such products or services used for non-brokerage or research purposes and will pay for such portion from its own funds. In such circumstance, the Advisor has a conflict of interest in making such decisions.
Many of the Funds' 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, other than certain transactions effected on a so-called riskless 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 typically deal with market makers unless it appears that better price and execution are available elsewhere.
It is expected that International Fund will purchase most foreign equity securities in the over-the-counter markets or stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located if that is the best available market. The fixed commission paid in connection with most such foreign stock transactions generally is 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.
The Funds do not effect any brokerage transactions in their portfolio securities with any broker or dealer affiliated directly or indirectly with the Advisor or Distributor unless such transactions, including the frequency thereof, the receipt of commission payable in connection therewith, and the selection of the affiliated broker or dealer effecting such transactions are not unfair or unreasonable to the shareholders of the Funds, as determined by the Board of Directors. Any transactions with an affiliated broker or dealer must be on terms that are both at least as favorable to the Funds as the Funds can obtain elsewhere and at least as favorable as such affiliated broker or dealer normally gives to others.
When two or more clients of the Advisor are simultaneously engaged in the purchase or sale of the same security, the prices and amounts are allocated in a manner considered by the Advisor to be equitable to each client. In some cases, this system could have a detrimental effect on the price or volume of the security as far as each client is concerned. In other cases, however, the ability of the clients to participate in volume transactions may produce better executions for each client.
The following table sets forth the aggregate brokerage commissions paid by certain of the Funds during the fiscal years ended September 30, 2004 and September 30, 2004, and the fiscal period ended June 30, 2006:
FISCAL YEAR FISCAL YEAR FISCAL PERIOD
ENDED ENDED ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 JUNE 30, 2006
------------------ ------------------ -------------
Core Bond Fund 24,670 9,126
High Income Bond Fund 2,057 26
Inflation Protected Securities
Fund (1) * 335
Intermediate Government Bond
Fund (2) 1,900 172
Intermediate Term Bond Fund 16,394 6,001
Short Term Bond Fund 2,625 0
Total Return Bond Fund 3,251 309
U.S. Government Mortgage Fund 2,971 1,010
Arizona Tax Free Fund -- --
California Intermediate Tax
Free Fund -- --
California Tax Free Fund -- --
Colorado Intermediate Tax Free
Fund -- --
Colorado Tax Free Fund -- --
Intermediate Tax Free Fund -- --
Minnesota Intermediate Tax
Free Fund -- --
Minnesota Tax Free Fund -- --
Missouri Tax Free Fund -- --
Nebraska Tax Free Fund -- --
Ohio Tax Free Fund -- --
Oregon Intermediate Tax Free
Fund -- --
Short Tax Free Fund (2) -- --
Tax Free Fund -- --
|
-- No commissions paid.
(1) Commenced operations October 1, 2004.
(2) Commenced operations on October 25, 2002.
The following table sets forth the value of transactions executed with, and commissions paid to, broker-dealers selected by the Advisor in part because of research products or services provided during the fiscal period ended June 30, 2006.
RELATED
TRANSACTIONS(1) BROKERAGE(1) COMMISSION
---------------- -----------------------
Balanced Fund $_____ $_____
Equity Income Fund _____ _____
Large Cap Growth Opportunities
Fund _____ _____
Large Cap Select Fund _____ _____
Large Cap Value Fund _____ _____
Mid Cap Growth Opportunities
Fund _____ _____
Mid Cap Value Fund _____ _____
Real Estate Securities Fund _____ _____
Small Cap Growth Opportunities
Fund _____ _____
Small Cap Select Fund _____ _____
Small Cap Value Fund _____ _____
Small - Mid Cap Core Fund _____ _____
|
At June 30, 2006, certain Funds held the securities of their "regular brokers or dealers" as follows:
REGULAR BROKER OR DEALER AMOUNT OF SECURITIES HELD
FUND ISSUING SECURITIES BY FUND (000) TYPE OF SECURITIES
---- ------------------------ ------------------------- ------------------
Core Bond $_____
Inflation Protected Securities $_____
Intermediate Term Bond $_____
Short Term Bond $_____
Total Return Bond $_____
U.S. Government Mortgage $_____
|
CAPITAL STOCK
Each share of each Fund's $.01 par value common stock is fully paid, nonassessable, and transferable. Shares may be issued as either full or fractional shares. Fractional shares have pro rata the same rights and privileges as full shares. Shares of the Funds have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of directors, all shares of all FAIF Funds vote together as one series. The shares do not have cumulative voting rights. On issues affecting only a particular Fund, the shares of that Fund will vote as a separate series. Examples of such issues would be proposals to alter a fundamental investment restriction pertaining to a Fund or to approve, disapprove or alter a distribution plan. The Bylaws of FAIF provide that annual shareholders meetings are not required and that meetings of shareholders need only be held with such frequency as required under Minnesota law and the 1940 Act.
As of October __, 2006, the directors and officers of FAIF as a group owned less than one percent of each Fund's outstanding shares and the Funds were aware that the following persons owned of record five percent or more of the outstanding shares of each class of stock of the Funds:
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
[FUND NAME]
|
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The public offering price of the shares of a Fund generally equals the Fund's net asset value plus any applicable sales charge. A summary of any applicable sales charge assessed on Fund share purchases is set forth in the Funds' Prospectuses. The public offering price of the Class A Shares of the Bond Funds and Tax Free Funds as of June 30, 2006 was as set forth below. Please note that the public offering prices of Class B, Class C, Class Y and Class R Shares are the same as net asset value since no sales charges are imposed on the purchase of such shares.
PUBLIC OFFERING PRICE
FUND CLASS A
---- ---------------------
Core Bond Fund $_____
High Income Bond Fund _____
Inflation Protected Securities
Fund _____
Intermediate Government Bond
Fund _____
Intermediate Term Bond Fund _____
Short Term Bond Fund _____
Total Return Bond Fund _____
U.S. Government Mortgage Fund _____
Arizona Tax Free Fund _____
California Intermediate Tax
Free Fund _____
California Tax Free Fund _____
Colorado Intermediate Tax Free
Fund _____
Colorado Tax Free Fund _____
Intermediate Tax Free Fund _____
Minnesota Intermediate Tax
Free Fund _____
Minnesota Tax Free Fund _____
Missouri Tax Free Fund _____
Nebraska Tax Free Fund _____
Ohio Tax Free Fund _____
Oregon Intermediate Tax Free
Fund _____
Short Tax Free Fund _____
Tax Free Fund _____
|
The net asset value of each Fund's shares is determined on each day during which the New York Stock Exchange (the "NYSE") is 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 held by a Fund are traded on days that the Fund is not open for business, such Fund's net asset value per share may be affected on days when investors may not purchase or redeem shares. This may occur, for example, where a Fund holds securities which are traded in foreign markets.
On June 30, 2006, the net asset values per share for each class of shares of the Bond Funds and the Tax Free Funds were calculated as follows.
SHARES NET ASSET
NET ASSETS OUTSTANDING VALUE PER SHARE
---------- ----------- ---------------
CORE BOND FUND
Class A $_____ $_____ $_____
Class B _____ _____ _____
Class C _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
HIGH INCOME BOND FUND
Class A _____ _____ _____
Class B _____ _____ _____
Class C _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
INFLATION PROTECTED SECURITIES
FUND
Class A _____ _____ _____
Class B _____ _____ _____
|
SHARES NET ASSET
NET ASSETS OUTSTANDING VALUE PER SHARE
---------- ----------- ---------------
Class C _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
INTERMEDIATE GOVERNMENT BOND
FUND
Class A _____ _____ _____
Class Y _____ _____ _____
INTERMEDIATE TERM BOND FUND
Class A _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
SHORT TERM BOND FUND
Class A _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
TOTAL RETURN BOND FUND
Class A _____ _____ _____
Class B _____ _____ _____
Class C _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
U.S. GOVERNMENT MORTGAGE FUND
Class A _____ _____ _____
Class B _____ _____ _____
Class C _____ _____ _____
Class R _____ _____ _____
Class Y _____ _____ _____
ARIZONA TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
CALIFORNIA INTERMEDIATE TAX
FREE FUND
Class A _____ _____ _____
Class Y _____ _____ _____
CALIFORNIA TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
COLORADO INTERMEDIATE TAX FREE
FUND
Class A _____ _____ _____
Class Y _____ _____ _____
COLORADO TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
INTERMEDIATE TAX FREE FUND
Class A _____ _____ _____
Class Y _____ _____ _____
MINNESOTA INTERMEDIATE TAX
FREE FUND
Class A _____ _____ _____
Class Y _____ _____ _____
MINNESOTA TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
|
SHARES NET ASSET
NET ASSETS OUTSTANDING VALUE PER SHARE
---------- ----------- ---------------
MISSOURI TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
NEBRASKA TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
OHIO TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
OREGON INTERMEDIATE TAX FREE
FUND
Class A _____ _____ _____
Class Y _____ _____ _____
SHORT TAX FREE FUND
Class A _____ _____ _____
Class Y _____ _____ _____
TAX FREE FUND
Class A _____ _____ _____
Class C _____ _____ _____
Class Y _____ _____ _____
|
TAXATION
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.
With respect to a Fund's investments in U.S. Treasury inflation protected securities and other inflation protected securities that accrue inflation into their principal value, the Fund will be required to treat as original issue discount any increase in the principal amount of the securities that occurs during the course of its taxable year. If the Fund purchases such inflation protected 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. The Fund will be required to accrue as ordinary income a portion of such original issue discount even though it receives no cash currently as interest payment corresponding to the amount of the original issue discount. Because the Fund is required to distribute substantially all of its net investment income (including accrued original issue discount) in order to be taxed as a regulated investment company, it may be required to distribute an amount greater than the total cash income it actually receives. Accordingly, in order to make the required distributions, the Fund may be required to borrow or liquidate securities.
If one of the Tax Free Funds disposes of a municipal obligation that it acquired after April 30, 1993 at a market discount, it must recognize any gain it realizes on the disposition as ordinary income (and not as capital gain) to the extent of the accrued market discount.
Some of the investment practices that may be employed by the Funds will be subject to special provisions that, among other things, may defer the use of certain losses of such Funds, affect the holding period of the securities held by the Funds and, particularly in the case of transactions in or with respect to foreign currencies, affect the character of the gains or losses realized. These provisions may also require the Funds to mark-to-market some of the positions in their respective portfolios (i.e., treat them as closed out) or to accrue original discount, both of which may cause such Funds to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the distribution requirements for qualification as a regulated investment company and for avoiding income and excise taxes. Accordingly, in order to make the required distributions, a Fund may be required to borrow or liquidate securities. Each Fund will monitor its transactions and may make certain elections in order to mitigate the effect of these rules and prevent disqualification of the Funds as regulated investment companies.
When a Fund lends portfolio securities to a borrower as described above in "Lending of Portfolio Securities," payments in lieu of dividends made by the borrower to the Fund will not constitute "qualified dividends" taxable at the same rate as long-term capital gains, even if the actual dividends would have constituted qualified dividends had the Fund held the securities. Such payments in lieu of dividends are taxable as ordinary income.
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 requirement that a regulated investment company derive at least 90% of gross income from investment securities.
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 of exchange of such shares will be treated as a long-term capital loss to the extent of such long-term capital gain distribution. Furthermore, if a shareholder of any of the Tax-Free Funds receives an exempt-interest dividend from such fund and then disposes of his or her shares in such fund within six months after acquiring them, any loss on the sale or exchange of such shares will be disallowed to the extent of the exempt-interest dividend.
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 "Managing Your Investment -- Exchanging Shares" in the Prospectuses), such exchange will be considered a taxable sale of the shares being exchanged. Furthermore, if a shareholder of Class A,
Class B or Class C 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.
Pursuant to the Code, distributions of net investment income by a Fund to a shareholder who is a foreign shareholder (as defined below) will be subject to U.S. withholding tax (at a rate of 30% or lower treaty rate). Withholding will not apply if a dividend paid by a Fund to a foreign shareholder is "effectively connected" with a U.S. trade or business of such shareholder, in which case the reporting and withholding requirements applicable to U.S. citizens or domestic corporations will apply. Distributions of net long-term capital gains are not subject to tax withholding but, in the case of a foreign shareholder who is a nonresident alien individual, such distributions ordinarily will be subject to U.S. income tax at a rate of 30% if the individual is physically present in the U.S. for more than 182 days during the taxable year. Each Fund will report annually to its shareholders the amount of any withholding.
A foreign shareholder is any person who is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity organized in the United States or under the laws of the Untied States or a political subdivision thereof, (iii) an estate whose income is includible in gross income for U.S. federal income tax purposes or (iv) a trust whose administration is subject to the primary supervision of the U.S. court and which has one or more U.S. fiduciaries who have authority to control all substantial decisions of the trust.
The foregoing relates only to federal income taxation and is a general summary of the federal tax law in effect as of the date of this Statement of Additional Information.
With respect to the Minnesota Intermediate Tax Free Fund and the Minnesota Tax Free Fund, the 1995 Minnesota Legislature enacted a statement of intent (codified at Minn. Stat. Section 289A.50, subdivision 10) 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. To the knowledge of the Minnesota Intermediate Tax Free Fund and the Minnesota Tax Free Fund, courts in only two states have addressed whether a state's exemption of interest on its own bonds or those of its political subdivisions, but not of interest on the bonds of other states or their political subdivisions, unlawfully discriminates against interstate commerce or otherwise contravenes the United States Constitution. A court in Ohio decided in 1994 that the Ohio law was not unconstitutional, but the Kentucky Court of Appeals held early in 2006 that the Kentucky law violated the Commerce Clause. The Funds cannot predict the likelihood that interest on the Minnesota bonds held by the Funds would become taxable for Minnesota income tax purposes under Section 289A.50, subdivision 10.
REDUCING SALES CHARGES
CLASS A SALES CHARGE
Sales charges on the purchase of Class A shares can be reduced through (i) quantity discounts and accumulated purchases, or (ii) signing a 13-month letter of intent.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: Each Fund will combine purchases made by an investor, the investor's spouse or domestic partner, and the investor's dependent children when it calculates the sales charge.
For each Fund, the sales charge discount will be determined by adding (i) the purchase price (including sales charge) of the Fund shares that are being purchased, plus (ii) the purchase price of the Class A, Class B and Class C shares of any other First American fund (other than a money market fund) or any fund managed by Country Capital Management Company that you are concurrently purchasing, plus (iii) the current net asset value of Class A, Class B and Class C shares of the Fund or any other First American fund (other than a money market fund) or fund managed by Country Capital Management Company that you already own. In order for an investor to receive the sales charge reduction on Class A Shares, the Fund 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. If the purchase price of shares that the investor owns is higher than their current net asset value, the investor may receive credit for this higher purchase price instead, but only if the investor notifies the Fund of this request in advance in writing and provides written records of the original purchase price.
LETTER OF INTENT: If an investor intends to purchase, in the aggregate, at least $50,000 of Class A, Class B or Class C shares in the Funds, other First American funds (other than money market funds), or funds managed by Country Capital Management Company, 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 Funds' custodian to hold a percentage equal to the Funds' maximum sales charge rate of the total amount intended to be purchased in escrow (in shares) 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. Absent complete and current notification from the investor or from his or financial institution to the Fund, the investor may not realize the benefit of a reduced sales charge.
SALES OF CLASS A SHARES AT NET ASSET VALUE
General. The Class A, B and C share prospectuses for the Funds set forth the categories of investors eligible to purchase Class A shares without a sales charge. Included among those investors are the following persons who may purchase Class A shares of High Income Bond Fund at net asset value without a sales charge if they purchase from a COUNTRY Fund representative:
- shareholders of any COUNTRY Fund on or before March 1, 2002, who have continuously owned shares of any COUNTRY Fund since that date. Shareholders will be deemed to have "continuously owned shares" if they exchange shares of another COUNTRY Fund series or reinvest the proceeds of redemption from another COUNTRY Fund series within 60 days of redemption. Former shareholders of the COUNTRY Money Market Fund may satisfy these requirements by a continuous investment in the First American Prime Obligations Fund.
- shareholders who purchased Class Y or Class A shares with a waiver of the sales charge since March 1, 2002 and who have continuously owned such shares since.
- full-time employees, agents, employees of agents, retirees and directors (trustees), and members of their families (i.e., parent-in-law, parent, child, spouse, domestic partner, siblings, step or adopted relationships, grandparent, grandchild and UTMA accounts naming qualifying persons) of the Illinois Agricultural Association(R), the COUNTRY(R) Insurance & Financial Services group and their affiliated companies.
- shareholders investing through accounts at COUNTRY Trust Bank.
- the Illinois Agricultural Association and its affiliates and all Illinois country Farm Bureaus(R).
Purchases of $1 Million or More. Class A shares may be purchased without a sales charge by non-retirement accounts if the purchase, when aggregated with certain Class A, B and C share purchases as described in the Funds' Class A, B and C share prospectuses, totals $1 million or more. Your investment professional or financial institution may receive a commission equal to 1.00% on purchases of $1 million to $3 million, 0.50% on purchases in excess of $3 million up to $10 million, and 0.25% on purchases in excess of $10 million. Note that your investment professional or financial institution will only receive a commission equal to the rate required by the actual investment (without taking into account aggregation). For example, if your aggregated investments, including your current investment, total $6 million, but your current investment equals $2 million, your investment professional or financial institution may receive
a commission equal to 1.00% of $2 million. If such a commission is paid, you will be assessed a contingent deferred sales charge (CDSC) of 1% if you sell your shares within 18 months.
Class A Shares may also be purchased without a sales charge by 401(k), 403(b) and 457 plans, and profit sharing and pension plans, which invest $1 million or more. Your representative must notify the Fund if your retirement/deferred compensation plan is eligible for the sales load waiver. Securities firms, financial institutions and other industry professionals that enter into sales agreements with the Funds' distributor to perform share distribution services may receive a commission on such sales of the Funds equal to 0.25% on purchases in excess of $10 million. If such a commission is paid, the plan will be assessed a contingent deferred sales charge (CDSC) of 0.25% if it sells the shares within 18 months. A commission is paid only on Class A shares of First American Funds.
REINVESTMENT RIGHT
If Class A Shares of a Fund have been redeemed, the shareholder has a one-time right, within 180 days, to reinvest the redemption proceeds in Class A Shares of any First American fund at the next-determined net asset value without any sales charge. The Fund must be notified by the shareholder in writing or by his or her financial institution of the reinvestment in order to eliminate a sales charge. If the shareholder redeems his or her shares of a Fund, there may be tax consequences.
ADDITIONAL INFORMATION ABOUT PURCHASING CLASS Y SHARES
As set forth in the Class Y share prospectuses, among those eligible to purchase Class Y shares are individual investors who have at least $5 million invested in the First American open-end funds. In determining whether the $5 million dollar threshold has been reached the net asset value of the First American open-end fund shares that are being purchased will be added to the current net asset value of any shares of the First American open-end funds that you already own. In addition, your purchase will be aggregated with shares held or being concurrently purchased by your spouse or domestic partner and your dependent children, and shares held by you or any of the foregoing persons in individual retirement, custodial or personal trust accounts. You must notify your investment professional or financial institution of your eligibility to purchase Class Y shares.
ADDITIONAL INFORMATION ABOUT REDEEMING SHARES
BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege on the initial shareholder application, by calling his or her financial institution to request the redemption. Shares will be redeemed at the net asset value next determined after the Fund receives the redemption request from the financial institution (less the amount of any applicable contingent deferred sales charge). Redemption requests must be received by the financial institution by the time specified by the institution in order for shares to be redeemed at that day's net asset value, and redemption requests must be transmitted to and received by the Funds as of the close of regular trading on the New York Stock Exchange (usually by 3:00 p.m. Central time) in order for shares to be redeemed at that day's net asset value unless the financial institution has been authorized to accept redemption requests on behalf of the Funds. Pursuant to instructions received from the financial institution, redemptions will be made by check or by wire transfer. It is the financial institution's responsibility to transmit redemption requests promptly. Certain financial institutions are authorized to act as the Funds' agent for the purpose of accepting redemption requests, and the Funds will be deemed to have received a redemption request upon receipt of the request by the financial institution.
Shareholders who did not purchase their shares of a Fund through a financial institution may redeem their shares by telephoning Investor Services at 800 677-FUND. At the shareholder's request, redemption proceeds will be paid by check mailed to the shareholder's address of record or wire transferred to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System, normally within one business day, but in no event more than seven days after the request. Wire instructions must be previously established on the account or provided in writing. The minimum amount for a wire transfer is $1,000. If at any time the Funds determine it necessary to terminate or modify this method of redemption, shareholders will be promptly notified. The Funds may limit telephone redemption requests to an aggregate of $50,000 per day across the First American Fund family.
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 Administrator nor any Fund will be responsible for any loss, liability, cost or expense for acting upon wire transfer instructions or telephone instructions that they reasonably believe to be genuine. The Administrator and the Funds will each employ reasonable procedures to confirm that instructions communicated are genuine. These procedures may include taping of telephone conversations. To ensure authenticity of redemption or exchange instructions received by telephone, the Administrator examines each shareholder request by verifying the account number and/or tax identification number at the time such request is made. The Administrator subsequently sends confirmation of both exchange sales and exchange purchases to the shareholder for verification. If reasonable procedures are not employed, the Administrator and the Funds 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 Administrator, shareholder servicing agent, financial institution or USBFS. 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. Unless another form of payment is requested, a check for redemption proceeds normally is mailed within three days, but in no event more than seven days, after receipt of a proper written redemption request.
Shareholders requesting a redemption of $50,000 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;
- any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds, the Administrator and USBFS have adopted standards for accepting signature from the above institutions. The Funds may elect in the future to limit eligible signature guarantees to institutions that are members of a signature guarantee program. The Funds, the Administrator and USBFS reserve the right to amend these standards at any time without notice.
REDEMPTIONS 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 Administrator or USBFS is reasonably certain that the purchase payment has cleared, which could take up to fifteen calendar days from the purchase date.
FINANCIAL STATEMENTS
The financial statements of FAIF included in its Annual Report to shareholders for the fiscal period ended June 30, 2006 are incorporated herein by reference.
APPENDIX A
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. Market 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 LONG-TERM CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S
AAA: An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A C also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
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: Bonds and preferred stock that 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: Bonds and preferred stock that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat greater than in Aaa securities.
A: Bonds and preferred stock that 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 some time in the future.
BAA: Bonds and preferred stock that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such securities lack outstanding investment characteristics, and in fact have speculative characteristics as well.
BA: Bonds and preferred stock that are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes issues in this class.
B: Bonds and preferred stock that are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA: Bonds and preferred stock that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA: Bonds and preferred stock that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds and preferred stock that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
FITCH
AAA: Securities considered to be investment grade and of the highest credit quality. These ratings denote the lowest expectation of credit risk and are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Securities considered to be investment grade and of very high credit quality. These ratings denote a very low expectation of credit risk and indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: Securities considered to be investment grade and of high credit quality. These ratings denote a low expectation of credit risk and indicate strong capacity for timely payment of financial commitments. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Securities considered to be investment grade and of good credit quality. These ratings denote that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investments grade category.
BB: Securities considered to be speculative. These ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Securities are considered highly speculative. These ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC AND C: Securities have high default risk. Default is a real possibility, and capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. CC ratings indicate that default of some kind appears probable, and C ratings signal imminent default.
DDD, DD AND D: Securities are in default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. DDD obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. DD indicates potential recoveries in the range of 50%-90%, and D the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated DDD have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated DD and D are generally undergoing a formal reorganization or liquidation process; those rated DD are likely to satisfy a higher portion of their outstanding obligations, while entities rated D have a poor prospect for repaying all obligations.
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show the relative standing within the major rating categories.
RATINGS OF MUNICIPAL NOTES
STANDARD & POOR'S
SP-1: Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
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 superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of protection are ample although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. 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 2/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. None of the Funds will purchase commercial paper rated A-3 or lower.
A-1: A short-term obligation rated A-1 is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
MOODY'S
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers. None of the Funds will purchase Prime-3 commercial paper.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
- Well-established access to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers (or supporting institutions) rated Prime-3 have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt-protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
FITCH
Fitch employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers. None of the Funds will purchase F3 commercial paper.
F1: Securities possess the highest credit quality. This designation indicates the strongest capacity for timely payment of financial commitments and may have an added "+" to denote any exceptionally strong credit feature.
F2: Securities possess good credit quality. This designation indicates a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3: Securities possess fair credit quality. This designation indicates that the capacity for timely payments of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
GENERAL PRINCIPLES
FAF Advisors, Inc. ("FAF Advisors") is the investment manager for the First American family of mutual funds and for other separately managed accounts. As such, FAF Advisors has been delegated the authority to vote proxies with respect to the investments held in client accounts, unless the client has specifically retained such authority in writing. It is FAF Advisors' duty to vote proxies in the best interests of clients in a timely and responsive manner. In voting proxies, FAF Advisors also seeks to maximize total investment return for clients.
In the event of a sub-advisor, FAF Advisors delegates proxy voting to the sub-advisor who is responsible for developing and enforcing policies, which are reviewed regularly by FAF Advisors.
FAF Advisors' Investment Policy Committee, comprised of the firm's most senior investment professionals, is charged with oversight of the proxy voting policies and procedures. The Investment Policy Committee is responsible for (1) approving the proxy voting policies and procedures and (2) monitoring the activities of FAF Advisors' Proxy Voting Administration Committee.
POLICIES AND PROCEDURES
Policies. The Investment Policy Committee, after reviewing and concluding that such policies are reasonably designed to vote proxies in the best interests of clients, has approved and adopted the proxy voting policies of ISS, a leading national provider of proxy voting administrative and research services. As a result, such policies set forth FAF Advisors' positions on recurring proxy issues and criteria for addressing non-recurring issues. A summary of these policies is attached. These policies are reviewed periodically and therefore are subject to change. Even though it has adopted ISS's policies, FAF Advisors maintains the fiduciary responsibility for all proxy voting decisions. In appropriate situations, a portfolio manager can initiate action to override a standard policy for a particular vote and such override will be subject to approval of the Investment Policy Committee.
Procedures. Responsibility for certain administrative aspects of proxy voting rests with the FAF Advisors' Proxy Voting Administration Committee. The Proxy Voting Administration Committee also supervises the relationship with an outside firm that assists with the process, ISS. This firm apprises FAF Advisors of shareholder meeting dates, forward proxy voting materials, provide FAF Advisors with research on proxy proposals and voting recommendations and cast the actual proxy votes. ISS also serves as FAF Advisors' proxy voting record keeper and generates reports on how proxies were voted.
Conflicts of Interest. As an affiliate of U.S. Bancorp, a large, multi-service financial institution, FAF Advisors recognizes that there are numerous situations wherein it may have a perceived or real conflict of interest in voting the proxies of issuers or proxy proponents (e.g., a special interest group) who are clients or potential clients of some part of the U.S. Bancorp enterprise. Directors and officers of such companies also may have personal or familial relationships with the U.S. Bancorp enterprise and its employees that could give rise to conflicts of interest.
Although FAF Advisors strongly believes that, regardless of such real or perceived conflicts of interest, it will vote proxies in its clients' best interests. By adopting ISS's policies and generally deferring to ISS's recommendations, FAF Advisors believes the risk related to conflicts will be minimized.
To further minimize this risk, the Investment Policy Committee has also reviewed ISS's conflict avoidance policy and has concluded that it adequately addresses both the actual and perceived conflicts of interest the proxy voting service may face.
In the event the Proxy Voting Administration Committee determines that ISS faces a material conflict of interest with respect to a specific vote, the Proxy Voting Administration Committee will direct ISS how to vote. Before doing so, however, the Proxy Voting Administration Committee will confirm that FAF Advisors faces no material conflicts of the nature discussed above.
If the Proxy Voting Administration Committee concludes a material conflict does exist, it will recommend a course of action designed to address the conflict to the Investment Policy Committee. Such actions could include, but are not limited to:
- Obtaining instructions from the affected clients on how to vote the proxy;
- Disclosing the conflict to the affected clients and seeking their consent to permit FAF Advisors to vote the proxy;
- Voting in proportion to the other shareholders;
- Recusing an Investment Policy Committee member from all discussion or consideration of the matter, if the material conflict is due to such person's actual or potential conflict of interest; or
- Following the recommendation of a different independent third party.
In addition to all of the above, members of the Investment Policy Committee and the Proxy Voting Administration Committee must notify FAF Advisors' Chief Compliance Officer of any direct, indirect or perceived improper influence made by any employee, officer or director within the U.S. Bancorp enterprise or First American Fund complex with regard to how FAF Advisors should vote proxies. The Chief Compliance Officer will investigate the allegations and will report the findings to the FAF Advisors Chief Executive Officer and the General Counsel. If it is determined that improper influence was attempted, appropriate action shall be taken. Such appropriate action may include disciplinary action, notification of the appropriate senior managers within the U.S. Bancorp enterprise, or notification of the appropriate regulatory authorities. In all cases, the Investment Policy Committee shall not consider any improper influence in determining how to vote proxies and will vote in the best interests of clients.
REVIEW AND REPORTS
On a regular basis, the Proxy Voting Administration Committee will review the proxy voting record to assess a number of matters. The review will include:
- Monitor proxy votes cast to ensure they are consistent with FAF Advisors policy.
- Ensure proxy votes are cast in a timely manner.
- Ensure proxy ballots are sent to and received by ISS in a timely manner.
The Proxy Voting Administration Committee will report periodically to the Investment Policy Committee, including a review of all identified conflicts and how they were addressed. These reports will include all funds, including those that are sub-advised.
With respect to the review of votes cast on behalf of investments by the First American family of mutual funds, such review will also be reported to the independent Board of Directors of the First American Funds.
VOTE DISCLOSURE TO SHAREHOLDERS
The actual proxy voting records of the First American Funds will be filed with the U.S. Securities Exchange Commission and will be available to shareholders after June 30, 2004. Such records will be available on the First American Funds' website at www.firstamericanfunds.com and on the SEC's website at www.sec.gov. Additionally, shareholders can receive, on request, the voting records for the First American Fund mutual funds by calling a toll free number (1-800-677-3863).
FAF Advisors' separately managed account clients can contact their relationship manager for more information on FAF Advisors' policies and the proxy voting record for their account.
The information that will be available includes, name of issuer; ticker/CUSIP; shareholder meeting date; description of item and FAF Advisors' vote.
ISS PROXY VOTING GUIDELINES SUMMARY
The following is a concise summary of ISS's proxy voting policy guidelines.
1. AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the company, and is therefore not independent
- Fees for non-audit services are excessive, or
- There is reason to believe that the independent auditor has rendered an opinion, which is neither accurate nor indicative of the company's financial position.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the following factors: independence of the board and key board committees, attendance at board meetings, corporate governance provisions and takeover activity, long-term company performance, responsiveness to shareholder proposals, any egregious board actions, and any excessive non-audit fees or other potential auditor conflicts.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal classified boards and to elect all directors annually.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures in place that counterbalance a combined position, certain factors should be taken into account in determining whether the proposal warrants support. These factors include the presence of a lead director, board and committee independence, governance guidelines, company performance, and annual review by outside directors of CEO pay.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS's definition of independence. Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard.
3. SHAREHOLDER RIGHTS
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent. Vote FOR proposals to allow or make easier shareholder action by written consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings. Vote FOR proposals that remove restrictions on the right of shareholders to act independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR proposals to lower supermajority vote requirements.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative voting. Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis relative to the company's other governance provisions.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived. Vote FOR management proposals to adopt confidential voting.
4. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE basis, considering the factors that include the long-term financial performance, management's track record, qualifications of director nominees (both slates), and an evaluation of what each side is offering shareholders.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also recommend voting for reimbursing proxy solicitation expenses.
5. POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's poison pill and management proposals to ratify a poison pill.
6. MERGERS AND CORPORATE RESTRUCTURINGS
Vote CASE-BY-CASE on mergers and corporate restructurings based on such features as the fairness opinion, pricing, strategic rationale, and the negotiating process.
7. REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes.
8. CAPITAL STRUCTURE
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a CASE-BY-CASE basis using a model developed by ISS. Vote AGAINST proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights. Vote FOR proposals to approve increases beyond the allowable increase when a company's shares are in danger of being delisted or if a company's ability to continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior voting rights. Vote FOR proposals to create a new class of nonvoting or subvoting common stock if:
- It is intended for financing purposes with minimal or no dilution to current shareholders
- It is not designed to preserve the voting power of an insider or significant shareholder
9. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily focuses on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders instead of simply focusing on voting power dilution). Using the expanded compensation data disclosed under the SEC's rules, ISS will value every award type. ISS will include in its analyses an estimated dollar cost for the proposed plan and all continuing plans. This cost, dilution to shareholders' equity, will also be expressed as a percentage figure for the transfer of shareholder wealth, and will be considered long with dilution to voting power. Once ISS determines the estimated cost of the plan, we compare it to a company-specific dilution cap.
Vote AGAINST equity plans that explicitly permit repricing or where the company has a history of repricing without shareholder approval.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are evaluated on a CASE-BY-CASE basis giving consideration to the following:
- Historic trading patterns
- Rationale for the repricing
- Value-for-value exchange
- Option vesting
- Term of the option
- Exercise price
- Participation
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR employee stock purchase plans where all of the following apply:
- Purchase price is at least 85 percent of fair market value
- Offering period is 27 months or less, and
- Potential voting power dilution (VPD) is ten percent or less.
Vote AGAINST employee stock purchase plans where any of the opposite conditions obtain.
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long term corporate outlook.
10. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public safety, environment and energy, general corporate issues, labor standards and human rights, military business, and workplace diversity.
In general, vote CASE-BY-CASE. While a wide variety of factors goes into each analysis, the overall principal guiding all vote recommendations focuses on how the proposal will enhance the economic value of the company.
FIRST AMERICAN INVESTMENT FUNDS, INC.
PART C - OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit (1) to Post-Effective Amendment No. 21, Filed on May 15, 1995 (File Nos. 033-16905, 811-05309)).
(a)(2) Articles Supplementary, designating new series and new share classes (Incorporated by reference to Exhibit (1) to Post-Effective Amendment No. 36, Filed on April 15, 1998 (File Nos. 033-16905, 811-05309)).
(a)(3) Articles Supplementary, designating new series and new share classes (Incorporated by reference to Exhibit (a)(2) to Post-Effective Amendment No. 54, Filed on June 27, 2001 (File Nos. 033-16905, 811-05309)).
(a)(4) Articles Supplementary, designating new series (Incorporated by reference to Exhibit (a)(3) to Post-Effective Amendment No. 61, Filed on April 30, 2002 (File Nos. 033-16905, 811-05309)).
(a)(5) Articles Supplementary designating new series (Incorporated by reference to Exhibit (a)(4) to Post-Effective Amendment No. 65, Filed on October 24, 2002 (File Nos. 033-16905, 811-05309)).
(a)(6) Articles Supplementary designating new series (Incorporated by reference to Exhibit (a)(5) to Post-Effective Amendment No. 66, Filed on January 28, 2003 (File Nos. 033-16905, 811-05309)).
(a)(7) Articles Supplementary decreasing authorizations of specified classes and series and decreasing total authorized shares (Incorporated by reference to Exhibit (a)(6) to Post-Effective Amendment No. 70, filed on June 30, 2004 File nos. 033-16905, 811-05309).
(a)(8) Articles Supplementary designating new series (Incorporated by reference to Exhibit (a)(7) to Post-Effective Amendment No. 72, filed on September 24, 2004 (File Nos. 033-16905, 811-05309).
(b) Bylaws, as amended (Incorporated by reference to Exhibit (b) to Post-Effective Amendment No. 72, Filed on September 24, 2004 (File Nos. 033-16905, 811-05309)).
(c) Not applicable.
(d)(1) Investment Advisory Agreement dated April 2, 1991, between the Registrant and First Bank National Association. (Incorporated by reference to Exhibit (d)(1) to Post-Effective Amendment No. 73, Filed on December 2, 2004 (File Nos. 033-16905, 811-05309)).
(d)(2) Supplement dated as of December 31, 1993 to Investment Advisory Agreement relating to authority to appoint a subadviser to International Fund. (Incorporated by reference to Exhibit (d)(2) to Post-Effective Amendment No. 73, Filed on December 2, 2004 (File Nos. 033-16905, 811-05309)).
(d)(3) Assignment and Assumption Agreement dated May 2, 2001, relating to
assignment of Investment Advisory Agreement to U.S. Bancorp Piper
Jaffray Asset Management, Inc. (Incorporated by reference to Exhibit
(d)(3) to Post-Effective Amendment No. 73, Filed on December 2, 2004
(File Nos. 033-16905, 811-05309)).
(d)(4) Exhibit A to Investment Advisory Agreement, effective October 1, 2004
(series and advisory fees) (Incorporated by reference to Exhibit (d)(2)
to Post-Effective Amendment No. 72, Filed on September 24, 2004 (File
Nos. 033-16905, 811-05309)).
(d)(5) Amendment to Investment Advisory Agreement, dated as of June 21, 2005, permitting Registrant to purchase securities from Piper Jaffray & Co. (Incorporated by reference to Exhibit (d)(5) to Post-Effective Amendment No. 77, Filed on August 3, 2005 (File Nos. 033-16905, 811-05309)).
(d)(6) Amendment to Investment Advisory Agreement, dated July 1, 2005, reducing advisory fees for certain funds (Incorporated by reference to Exhibit (d)(7) to Post-Effective Amendment No. 79, Filed on December 27, 2005 (File Nos. 033-16905, 811-05309)).
(d)(7) Sub-Advisory Agreement dated December 9, 2004, by and among Registrant,
FAF Advisors, Inc. and J.P. Morgan Investment Management Inc. with
respect to International Fund. (Incorporated by reference to Exhibit
(d)(6) to Post-Effective Amendment No. 74, Filed on January 31, 2005
(File Nos. 033-16905, 811-05309)).
(e)(1) Distribution Agreement between the Registrant and Quasar Distributors,
LLC, effective July 1, 2005 (Incorporated by reference to Exhibit
(e)(1) to Post-Effective Amendment No. 77, Filed on August 3, 2005
(File Nos. 033-16905, 811-05309)).
(e)(2) Form of Dealer Agreement.*
(f)(1) Deferred Compensation Plan for Directors Trust Agreement dated January 1, 2000, as amended February 2005 (Incorporated by reference to Exhibit No. (f)(1) to Post-Effective Amendment No. 76, filed May 13, 2005 (File Nos. 033-16905, 811-05309)).
(f)(2) Deferred Compensation Plan for Directors Trust Agreement, Amended Summary of Terms dated February 2005 (Incorporated by reference to Exhibit No. (f)(2) to Post-Effective Amendment No. 76, filed May 13, 2005 (File Nos. 033-16905, 811-05309)).
(g)(1) Custodian Agreement dated July 1, 2006, between the Registrant and U.S.
Bank National Association.*
(g)(2) Custodian Agreement dated July 1, 2005, by and between Registrant and State Street Bank and Trust Company with respect to International Fund (Incorporated by reference to Exhibit (g)(5) to Post-Effective Amendment No. 77, Filed on August 3, 2005 (File Nos. 033-16905, 811-05309)).
(h)(1) Administration Agreement dated July 1, 2006, by and between Registrant and FAF Advisors, Inc.*
(h)(2) Schedule A to Administration Agreement dated July 1, 2006 between Registrant and FAF Advisors, Inc.*
(h)(3) Sub-Administration Agreement dated July 1, 2005, by and between FAF Advisors, Inc. and U.S. Bancorp Fund Services, LLC (Incorporated by reference to Exhibit (h)(2) to Post-Effective Amendment No. 77, Filed on August 3, 2005 (File Nos. 033-16905, 811-05309)).
(h)(4) Transfer Agent and Shareholder Servicing Agreement dated July 1, 2006, by and among Registrant, and U.S. Bancorp Fund Services, LLC.*
(h)(5) Shareholder Servicing Plan and Agreement (Class R), effective June 30, 2004, between the Registrant and FAF Advisors, Inc. (Incorporated by reference to Exhibit No. (e)(8) to Post-Effective Amendment No. 70, filed June 30, 2004 (File Nos. 033-16905, 811-05309)).
(i) Opinion and Consent of Dorsey & Whitney LLP dated August 31, 2006.*
(j) Consent of Ernst & Young LLP.**
(k) Not applicable.
(l) Not applicable.
(m)(1) Amended and Restated Distribution and Service Plan for Class A, B, C, and R shares, effective July 1, 2005 (Incorporated by reference to Exhibit (m)(1) to Post-Effective Amendment No. 77, Filed on August 3, 2005 (File Nos. 033-16905, 811-05309)).
(n)(1) Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3, effective July 1, 2005 (Incorporated by reference to Exhibit (n)(1) to Post-Effective Amendment No. 77, Filed on August 3, 2005 (File Nos. 033-16905, 811-05309)).
(o) Reserved.
(p)(1) First American Funds Code of Ethics adopted under Rule 17j-1 of the Investment Company Act of 1940 and Section 406 of the Sarbanes-Oxley Act, effective April 14, 2005.*
(p)(2) FAF Advisors, Inc. Code of Ethics adopted under Rule 17j-1 of the Investment Company Act of 1940, effective December 8, 2005.*
(p)(3) J.P. Morgan Investment Management Inc. Code of Ethics adopted under Rule 17j-1 of the Investment Company Act of 1940, effective February 1, 2005, revised September 29, 2005.*
(p)(4) Quasar Distributors, LLC Code of Ethics adopted under Rule 17j-1 of the Investment Company Act of 1940, effective September 1, 2005 (Incorporated by reference to Exhibit (p)(4) to Post-Effective Amendment No. 79, Filed on December 27, 2005 (File Nos. 033-16905, 811-05309)).
(q) Power of Attorney dated June 20, 2006.*
* Filed herewith. ** To be filed by subsequent amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner, under such circumstances, and to the full extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereafter amended, and any rules, regulations, or releases promulgated
thereunder. Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person against judgments, penalties, fines, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the Minnesota Statutes dealing with directors'
conflicts of interest, if applicable, have been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe that the conduct was
unlawful; and reasonably believed that the conduct was in the best interests of
the corporation or, in certain circumstances, reasonably believed that the
conduct was not opposed to the best interests of the corporation. The Registrant
undertakes that no indemnification or advance will be made unless it is
consistent with Sections 17(h) or 17(i) of the Investment Company Act of 1940,
as now enacted or hereafter amended, and Securities and Exchange Commission
rules, regulations, and releases (including, without limitation, Investment
Company Act of 1940 Release No. 11330, September 2, 1980). Insofar as the
indemnification for liability arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser, FAF Advisors, Inc. (the "Manager"), is described in the section of each series' Statement of Additional Information, filed as part of this Registration Statement, entitled "Investment Advisory and Other Services." The directors and officers of the Manager are listed below, together with their principal occupation or other positions of a substantial nature during the past two fiscal years.
Thomas S. Schreier, Jr., President and Chief Executive Officer and chair of Board of Directors, FAF Advisors, Inc. ("FAF Advisors"), Minneapolis, MN (May 2001 to present); President, First American Investment Funds, Inc. ("FAIF"), First American Funds, Inc. ("FAF"), First American Strategy Funds, Inc. ("FASF"), and eight closed-end funds advised by FAF Advisors--American Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc. - II, American Strategic Income Portfolio Inc. - III, American Select Portfolio Inc., American Municipal Income Portfolio Inc., Minnesota Municipal Income Portfolio Inc., First American Minnesota Municipal Income Fund II, Inc., and American Income Fund, Inc. collectively referred to as the First American Closed-End Funds ("FACEF"), Minneapolis, MN (February 2001 to present); President, Mount Vernon Securities Lending Trust, Minneapolis, MN (October 2005 to present).
Mark S. Jordahl, Chief Investment Officer and director on Board of
Directors, FAF Advisors, Minneapolis, MN (July 2001 to present); Vice President
- Investments, FAIF, FAF, FASF, and FACEF, Minneapolis, MN (September 2001 to
present); Vice President - Investments, Mount Vernon Securities Lending Trust,
Minneapolis, MN (October 2005 to present).
Charles R. Manzoni, Jr., General Counsel and Secretary and director on Board of Directors, FAF Advisors, Minneapolis, MN (June 2004 to present).
Joseph M. Ulrey, III, Chief Financial Officer and director on Board of Directors, FAF Advisors, Minneapolis, MN (December 2004 to present); Interim Chief Operating Officer, Shareholder Services and Fund Treasurer (April 2004 to December 2004).
Charles D. Gariboldi, Jr., Treasurer, FAF Advisors, Minneapolis, MN (October 2004 to present); Treasurer, FAIF, FAF, FASF, and FACEF, Minneapolis, MN (December 2004 to present); Treasurer, Mount Vernon Securities Lending Trust, Minneapolis, MN (October 2005 to present); Vice President, Investment Accounting and Fund Treasurer, Thrivent Financial for Lutherans, Minneapolis, MN (1999 to October 2004).
David H. Lui, Chief Compliance Officer, FAF Advisors, Minneapolis, MN (March 2005 to present); Chief Compliance Officer, FAIF, FAF, FASF, and FACEF, Minneapolis, MN (February 2005 to present); Chief Compliance Officer, Mount Vernon Securities Lending Trust, Minneapolis, MN (October 2005 to present); Chief Compliance Officer, Franklin Advisers, Inc. and Chief Compliance Counsel, Franklin Templeton Investments, San Mateo, CA (2004 to February 2005); Head of Institutional Compliance and Chief Compliance Counsel, Charles Schwab & Co., Inc., San Francisco, CA (1992 to 2004).
John P. Kinsella, Senior Vice President and Director of Tax, FAF Advisors, Minneapolis, MN (February 2003 to present) .
ITEM 27. PRINCIPAL UNDERWRITERS
Registrant's distributor, Quasar Distributors, LLC (the "Distributor") acts as principal underwriter and distributor for the following investment companies:
AIP Alternative Strategies Funds Fund X Funds Monetta Trust Akros Absolute Return Fund Glenmede Fund, Inc. MP63 Fund Al Frank Funds Glenmede Portfolios Muhlenkamp (Wexford Trust) Allied Asset Advisors Funds Greenspring Fund Mutuals.com Alpine Equity Trust Greenville Small Cap Growth Fund Mutuals.com Vice Fund Alpine Income Trust Guinness Atkinson Funds Nicholas Funds Alpine Series Trust Harding Loevner Funds Osterweis Funds American Trust Allegiance Fund Hennessy Funds, Inc Perkins Capital Management Appleton Group Hennessy Mutual Funds, Inc. Permanent Portfolio Funds Ascentia Long/Short Fund Hester Total Return Fund Perritt Opportunities Funds Bowen, Hanes Investment Trust High Pointe Funds PIA Funds Brandes Investment Trust Hodges Fund PIC Funds Brandywine Blue Funds, Inc. Hotchkis and Wiley Funds Portfolio 21 Brazos Mutual Funds Intrepid Capital Management Primecap Odyssey Funds Bridges Investment Fund, Inc. Jacob Internet Fund Inc. Prudent Bear Funds, Inc. Buffalo Funds Jacobs & Company Mutual Fund Purisima Funds Capital Advisors Funds Jensen Portfolio Rainier Funds CastleRock Fund Julius Baer Funds Rigel Capital, LLC Chase Funds Kensington Funds Rockland Small Cap Growth Fund Cookson Peirce Keystone Mutual Funds Sincere Small Cap Fund Country Funds Kiewit Investment Fund L.P. Snow Fund Cullen Funds Kirr Marbach Partners Funds, Inc Stephens Management Co. Duncan-Hurst Funds Leonetti Funds Summit Funds Edgar Lomax Value Fund Lighthouse Capital Management Teberg Fund Everest Funds LKCM Funds Thompson Plumb (TIM) FFTW Funds, Inc. Masters' Select Fund Trust TIFF Investment Program, Inc. FIMCO Funds Matrix Asset Advisors, Inc. Tygh Capital Management First American Funds, Inc. McCarthy Fund Villere Fund First American Investment Funds, Inc. McIntyre Global Equity Fund Women's Equity Fund First American Strategy Funds, Inc. Midanek/Pak Fund Fort Pitt Capital Group, Inc. Monetta Fund, Inc. |
The board members and officers of Quasar Distributors, LLC and their positions or offices with the Registrant are identified in the following table. Unless otherwise noted, the business address for each board member or officer is Quasar Distributors, LLC 615 East Michigan Street, Milwaukee, WI 53202.
POSITION AND OFFICES WITH POSITION AND OFFICES WITH
NAME UNDERWRITER REGISTRANT
---- ------------------------- -------------------------
James R. Schoenike President, Board Member None
Joe D. Redwine Board Member None
Robert Kern Board Member None
777 East Wisconsin Avenue
Milwaukee, WI 53202
Eric W. Falkeis Board Member None
777 East Wisconsin Avenue
Milwaukee, WI 53202
Susan L. La Fond Financial Operations Principal None
Andrew M. Strnad Secretary None
Teresa Cowan Assistant Secretary None
|
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by FAF Advisors, Inc. 800 Nicollet Mall, Minneapolis,
Minnesota, 55402, and U.S. Bancorp Fund Services, LLC, 615 E. Michigan Street,
Milwaukee, Wisconsin 53202.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
SIGNATURES
As required by the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Post-Effective Amendment to its Registration Statement Nos. 033-16905 and 811-05309 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on the 31st day of August 2006.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By: /s/ Thomas S. Schreier, Jr.
---------------------------
Thomas S. Schreier, Jr.
President
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed below by the following persons in the capacity indicated and on August 31, 2006.
SIGNATURE TITLE
--------- -----
/s/ Thomas S. Schreier, Jr.
---------------------------------------------------- President
Thomas S. Schreier, Jr.
/s/ Charles D. Gariboldi, Jr.
---------------------------------------------------- Treasurer (principal financial/accounting officer)
Charles D. Gariboldi, Jr.
*
----------------------------------------------------
Benjamin R. Field, III Director
*
----------------------------------------------------
Victoria J. Herget Director
*
----------------------------------------------------
Roger A. Gibson Director
*
----------------------------------------------------
Leonard W. Kedrowski Director
*
----------------------------------------------------
Richard K. Riederer Director
*
----------------------------------------------------
Joseph D. Strauss Director
*
----------------------------------------------------
Virginia L. Stringer Director
*
----------------------------------------------------
James M. Wade Director
* Richard J. Ertel, by signing his name hereto, does hereby sign this document on behalf of each of the above-named Directors of
First American Investment Funds, Inc. pursuant to the powers of attorney duly executed by such persons.
By: /s/ Richard J. Ertel
---------------------------------------------------- Attorney-in-Fact
Richard J. Ertel
|
INDEX TO EXHIBITS
EXHIBIT NUMBER NAME OF EXHIBIT -------------- --------------- (e)(2) Form of Dealer Agreement (g)(1) Custody Agreement (h)(1) Administration Agreement (h)(2) Schedule A to Administration Agreement (h)(4) Transfer Agent and Shareholder Servicing Agreement (i) Opinion and Consent of Dorsey & Whitney LLP (p)(1) First American Funds Code of Ethics (p)(2) FAF Advisors Code of Ethics (p)(3) J.P. Morgan Investment Management Inc. Code of Ethics (q) Power of Attorney |
Exhibit 99(e)(2)
QUASAR DISTRIBUTORS, LLC
615 EAST MICHIGAN STREET
MILWAUKEE, WI 53202
DEALER AGREEMENT
This Agreement is made and effective as of this ____ day of __________, 2006, between Quasar Distributors, LLC ("Quasar"), a Delaware limited liability company, and _________________________ ("Dealer"), a __________________________.
WHEREAS, First American Strategy Funds, Inc., First American Funds, Inc. and First American Investment Funds, Inc. (collectively, the "Fund Companies") are registered under the Investment Company Act of 1940, as amended ("1940 Act"), as open-end investment companies and currently offer for public sale shares of common stock or beneficial interest ("Shares") in the separate series of the Fund Companies listed on Schedule A, as may be amended from time to time (each, a "Fund");
WHEREAS, Quasar serves as principal underwriter in connection with the offering and sale of the Shares of each Fund pursuant to a Distribution Agreement; and
WHEREAS, Dealer desires to serve as a selected dealer for the Shares of the Funds.
NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, Quasar and Dealer agree as follows:
1. OFFERS AND SALES OF SHARES.
(a) Dealer agrees to offer and sell Shares only at the public offering price currently in effect, in accordance with the terms of the then-current prospectus(es), including any supplements or amendments thereto, of each Fund ("Prospectus"). The Dealer agrees to act only as agent on behalf of its customers ("Customers") in such transactions and shall not have authority to act as agent for the Funds, for Quasar, or for any other dealer in any respect. All purchase orders are subject to acceptance by Quasar and the relevant Fund and become effective only upon confirmation by Quasar or an agent of the Fund. In its sole discretion, either the Fund or Quasar may reject any purchase order and may, provided notice is given to Dealer, suspend sales or withdraw the offering of Shares entirely.
(b) Dealer understands and acknowledges that each Fund offers its Shares in multiple classes, each subject to differing sales charges and financing structures. Dealer hereby represents and warrants that it has established compliance procedures designed to ensure that customers are made aware of the terms of each available class of the applicable Fund's Shares, to ensure that each customer is offered only Shares that are suitable investments of that customer and to ensure proper supervision of Dealer's registered representatives in recommending and offering multiple classes of Shares to it customers.
(c) Dealer understands and acknowledges that certain Shares may be subject to a contingent deferred sales charge when such Shares are redeemed. As to such Shares which are not networked, Dealer agrees either (i) to refrain from issuing such Shares in street name, or (ii) to monitor the time period during which the applicable contingent deferred sales charge remains in effect, to deduct from any redemption proceeds the applicable contingent deferred sales charge and to promptly remit to Quasar any such contingent deferred sales charge.
(d) Dealer agrees that, if requested by Quasar, it will undertake from time
to time certain shareholder servicing activities ("shareholder services") as
requested by Quasar, for Customers who have purchased Shares. Dealer may perform
these duties itself or subcontract them to a third party of its choice. These
shareholder services may include, but are not limited to, one or more of the
following services as determined by Quasar: (i) maintaining accounts relating to
Customers that invest in Shares; (ii) providing information periodically to
Customers showing their positions in Shares; (iii) arranging for bank wires;
(iv) responding to Customer inquiries relating to the services performed by
Dealer; (v) responding to routine inquiries from Customers concerning their
investments in Shares; (vi) forwarding shareholder communications from the Funds
(such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (vii)
processing purchase, exchange and redemption requests from Customers and placing
such orders with the Funds' service providers; (viii) assisting Customers in
changing dividend options, account designations, and addresses; (ix) providing
subaccounting with respect to Shares beneficially owned by Customers; (x)
processing dividend payments from the Funds on behalf of Customers; and (xi)
providing such other similar services as Quasar may reasonably request to the
extent Dealer is permitted to do so under applicable laws or regulations.
2. PROCEDURES FOR PURCHASES. The procedures relating to all orders and the handling of them shall be made in accordance with the procedures set forth in each Fund's Prospectus, and to the extent consistent with the Prospectus, written instructions forwarded to Dealer by Quasar from time to time.
Dealer shall be permitted to accept orders for the purchase, exchange or redemption of Shares of the Funds on each business day that the New York Stock Exchange is open for business and a Fund's net asset value is determined ("Business Day"). Dealer shall not be required to accept orders on any Business Day on which Dealer is not open for business. If orders are accepted by Dealer prior to the latest time at which a Fund's net asset value is to be calculated as determined by its Board of Directors/Trustees, which is typically as of the close of the New York Stock Exchange on that Business Day ("Close of Trading"), such orders shall be treated as having been received on that Business Day. If such orders are received after Close of Trading on a Business Day, they shall not be treated as having been accepted by Dealer on such Business Day.
All purchase orders shall be placed at, and in accordance with the applicable discount schedules set forth in the Fund's Prospectus.
3. SETTLEMENT AND DELIVERY FOR PURCHASES. Transactions shall be settled by Dealer by payment in federal funds of the full purchase price to the Fund's transfer agent in accordance with applicable procedures. Payment for Shares shall be received by the Fund's transfer agent by the later of (a) the end of the third business day following Dealer's receipt of the Customer's order to purchase such Shares or (b) the end of one business day following Dealer's receipt of the Customer's payment for such Shares, but in no event later than the end of the sixth business day following Dealer's receipt of the Customer's order. If such payment is not received within the time specified, the sale may be canceled forthwith without any responsibility or liability on Quasar's part or on the part of the Funds to Dealer or its Customers. In addition, Dealer will be responsible to the Fund and/or Quasar for any losses suffered on the transaction.
4. PROCEDURES FOR REDEMPTION, REPURCHASE AND EXCHANGE. Redemption or repurchases of Shares as well as exchange requests shall be made in accordance with the procedures set forth in each Fund's Prospectus, and to the extent consistent with the Prospectus, written instructions forwarded to Dealer by Quasar from time to time.
5. COMPENSATION. On each purchase of Shares by Dealer from Quasar, Dealer shall be entitled to receive such dealer allowances, concessions, finder's fees, sales charges, discounts and other compensation, if any, as described and set forth in each Fund's Prospectus. Sales charges and discounts to dealers, if any, may be subject to reductions under a variety of circumstances if described in each Fund's Prospectus. To obtain any such reductions, Quasar must be notified when a sale takes place that would qualify for the reduced charge. If any Shares sold by Dealer under the terms of this Agreement are redeemed by a Fund or tendered for redemption or repurchased by a Fund or by Quasar as agent within seven business days after the date Dealer purchased such Shares, Dealer shall notify Quasar in writing and shall forfeit its right to any discount or commission received by or allowed to Dealer from the original sale. Dealer shall not be entitled to any compensation for its services under any 12b-1 plan in effect for a Fund unless Dealer has signed a related agreement.
6. EXPENSES. The Dealer agrees that it will bear all expenses incurred in connection with its performance of this Agreement.
7. DEALER REGISTRATION.
(a) The Dealer represents and warrants that it (i) is registered as a broker-dealer under the Securities Exchange Act of 1934 (the "1934 Act") or is exempt from registration as a broker-dealer under the 1934 Act, (ii) is qualified as a broker-dealer in all states or other jurisdictions in which it sells Fund Shares or is exempt from registration as a broker-dealer in all states or other jurisdictions in which it sells Fund Shares, and, (iii) if it sells shares in additional states or jurisdictions in the future, will become qualified to act as a dealer in each such state or jurisdiction prior to selling any Fund shares or will confirm an exemption from registration as a broker-dealer in each such state or jurisdiction prior to selling any Fund shares.
(b) The Dealer shall maintain any filings and licenses required by federal and state laws to conduct the business contemplated under this Agreement. The Dealer agrees to notify Quasar immediately in the event of any finding that it violated any applicable federal or state law, rule or regulation arising out of its activities as a broker-dealer or in connection with this Agreement, or which may otherwise affect in any material way its ability to act in accordance with the terms of this Agreement.
(c) If Dealer is registered as a "bank," as such term is defined in Section 3(a)(6) of the 1934 Act, Dealer further represents and warrants that it is a member of the Federal Deposit Insurance Corporation ("FDIC") in good standing and agrees to notify Quasar immediately of any changes in Dealer's status with the FDIC.
(d) If Dealer is registered as a broker-dealer under the 1934 Act, Dealer represents and warrants that it is a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") and that it agrees to abide by the Conduct Rules of the NASD. Dealer agrees to notify Quasar immediately in the event of its expulsion or suspension from the NASD.
(e) If Dealer is registered as a broker-dealer under the 1934 Act, Dealer further represents and warrants that it is a member of the Securities Investor Protection Corporation ("SIPC") in good standing and agrees to notify Quasar immediately of any changes in Dealer's status with SIPC.
8. COMPLIANCE WITH FEDERAL AND STATE LAWS.
(a) Dealer will not sell any of the Shares except in compliance with all applicable federal and state securities and banking laws. In connection with sales and offers to sell Shares, Dealer will furnish or cause to be furnished to each person to whom any such sale or offer is made, at or prior to the time of offering or sale, a copy of the Prospectus and, if requested, the related Statement of Additional Information ("SAI"). Quasar shall be under no liability to Dealer except for lack of good faith and for obligations expressly assumed by Quasar herein. Nothing herein contained, however, shall be deemed to be a condition, stipulation or provision binding any persons acquiring any security to waive compliance with, or to relieve the parties hereto from any liability arising under, the federal securities laws.
(b) Quasar shall, from time to time, inform Dealer as to the states and jurisdictions in which Quasar believes the Shares have been qualified for sale under, or are exempt from the requirements of, the respective securities laws of such states and jurisdictions. Dealer agrees that it will not knowingly offer or sell Shares in any state or jurisdiction in which such Shares are not qualified, unless any such offer or sale is made in a transaction that qualifies for an exemption from registration.
(c) Quasar assumes no responsibility in connection with the registration of Dealer under the laws of the various states or under federal law or Dealer's qualification under any such law to offer or sell Shares.
9. UNAUTHORIZED REPRESENTATIONS. No person is authorized to make any representations concerning Shares of the Funds except those contained in the Prospectus, SAI and printed information issued by each Fund or by Quasar as information supplemental to each Prospectus. Quasar shall, upon request, supply Dealer with reasonable quantities of Prospectuses and SAIs. Dealer agrees not to use other advertising or sales material relating to the Funds unless approved by Quasar in advance of such use. Neither party shall use the name of the other party in any manner without the other party's written consent, except as required by any applicable federal or state law, rule or regulation, and except pursuant to any mutually agreed upon promotional programs.
10. CONFIRMATIONS. Dealer agrees to send confirmations of orders to its Customers as required by Rule 10b-10 of the 1934 Act and applicable banking laws and regulations. In the event the Customers of Dealer place orders directly with the Fund or any of its agents, confirmations will be sent to such Customers, as required, by the Fund's transfer agent.
11. RECORDS. Dealer agrees to maintain all records required by applicable state and federal laws and regulations relating to the offer and sale of Shares to its Customers, and upon the reasonable request of Quasar, or of the Funds, to make these records available to Quasar or the Fund's administrator as reasonably requested. On orders placed directly with the Fund or its agents, the Fund's transfer agent will maintain all records required by state and federal laws and regulations relating to the offer and sale of Shares.
12. TAXPAYER IDENTIFICATION NUMBERS. Dealer agrees to obtain any taxpayer identification number certification from its Customers required under the Internal Revenue Code and any applicable Treasury regulations, and to provide Quasar or its designee with timely written notice of any failure to obtain such taxpayer identification number certification in order to enable the implementation of any required backup withholding.
13. INDEMNIFICATION.
(a) Dealer shall indemnify and hold harmless Quasar, each Fund, the transfer agent and administrator of the Funds, and their respective affiliates, officers, directors, agents, employees and controlling persons from all direct or indirect liabilities, losses or costs (including reasonable attorneys' fees) arising from, related to or otherwise connected with any breach by Dealer of any provision of this Agreement.
(b) Quasar shall indemnify and hold harmless Dealer and its affiliates, officers, directors, agents, employees and controlling persons from and against any and all direct or indirect liabilities, losses or costs (including reasonable attorneys' fees) arising from, related to or otherwise connected with any breach by Quasar of any provision of this Agreement.
(c) The agreement of the parties in this Paragraph to indemnify each other is conditioned upon the party entitled to indemnification (the "Indemnified Party") notifying the other party (the "Indemnifying Party") promptly after the summons or other first legal process for any claim as to which indemnity may be sought is served on the Indemnified Party, unless failure to give such notice does not prejudice the Indemnifying Party. The Indemnified Party shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting from it,
provided that counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be approved by the Indemnified Party (which approval shall not unreasonably be withheld), and that the Indemnified Party may participate in such defense at its expense. The failure of the Indemnified Party to give notice as provided in this subparagraph (c) shall not relieve the Indemnifying Party from any liability other than its indemnity obligation under this Paragraph. No Indemnifying Party, in the defense of any such claim or litigation, shall, without the written consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect to such claim or litigation.
14. NO AGENCY CREATED. Nothing in this Agreement shall be deemed or construed to make Dealer an employee, agent, representative or partner of any of the Funds or of Quasar, and Dealer is not authorized to act for Quasar or for any Fund or to make any representations on Quasar's or the Funds' behalf. Dealer acknowledges that this Agreement is not exclusive and that Quasar may enter into similar arrangements with other institutions.
15. TERM, TERMINATION, ASSIGNMENT AND AMENDMENT.
(a) This Agreement shall commence on the date first set forth above and shall continue in effect with respect to a Fund for more than one year only so long as such continuance is specifically approved by such Fund at least annually in conformity with the requirements of the 1940 Act.
(b) Either party to this Agreement may terminate this Agreement by giving ten days' written notice to the other.
(c) This Agreement shall terminate automatically with respect to any Fund if (i) any bankruptcy, insolvency or receivership proceedings, or an assignment for the benefit of creditors, is brought under any federal or state law by or against Dealer, (ii) Dealer's registration, if any, as a broker-dealer with the Securities and Exchange Commission is suspended or revoked, (iii) Dealer's NASD membership, if any, is suspended or revoked, (iv) Dealer is not registered as a broker-dealer under the 1934 Act or in a state or other jurisdiction in which it sells Fund Shares and there is not an applicable exemption from registration as a broker-dealer under the 1934 Act or in the state or other jurisdiction in which it sells Fund Shares, (v) an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970 is filed against Dealer, or (vi) the Distribution Agreement between Quasar and a Fund is terminated (including as a result of an assignment). This Agreement also shall terminate automatically in the event of its "assignment," within the meaning of the 1940 Act.
(d) Termination of this Agreement by operation of this Paragraph 15 shall not affect any unpaid obligations under Paragraphs 3, 5 or 6 of this Agreement or the liability, legal and indemnity obligations set forth under Paragraphs 7, 8, 9 or 13 of this Agreement.
(e) This Agreement may be amended by Quasar upon written notice to Dealer, and Dealer shall be deemed to have consented to such amendment upon effecting any purchases of Shares for its own account or on behalf of any Customer's accounts following Dealer's receipt of such notice.
16. NOTICES. Except as otherwise specifically provided in this Agreement, any notice required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been given on the date delivered personally or by courier service or 3 days after sent by registered or certified mail, postage prepaid, return receipt requested or on the date sent and confirmed received by facsimile transmission to the other party's address set forth below:
Notice to Quasar shall be sent to:
Quasar Distributors, LLC
Attn: Dealer Agreement Department
615 East Michigan Street
Milwaukee, WI 53202
notice to Dealer shall be sent to:
17. MISCELLANEOUS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. 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. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors.
18. GOVERNING LAW. This Agreement shall be construed in accordance with the laws (without regard, however, to conflicts of law principles) of the State of Wisconsin, provided that no provision shall be construed in a manner not consistent with the 1940 Act or any rule or regulation thereunder.
19. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration in acordance with the then existing NASD Code of Arbitration Procedure. Any arbitration shall be conducted in Milwaukee, Wisconsin, and each arbitrator shall be from the securities industry. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.
20. CONFIDENTIALITY. Quasar and Dealer agree to preserve the confidentiality of any and all materials and information furnished by either party in connection with this Agreement. The provisions of this Paragraph shall not apply to any information which is: (a) independently developed by the receiving party, provided the receiving party can satisfactorily demonstrate such independent development with appropriate documentation; (b) known to the receiving party prior to disclosure by the disclosing party; (c) lawfully disclosed to the receiving party by a third party not under a separate duty of confidentiality with respect thereto to the disclosing party; or (d) otherwise publicly available through no fault or breach by the receiving party.
In accordance with Regulation S-P, the parties hereto will not disclose any non-public personal information, as defined in Regulation S-P, regarding any Customer; provided, however, that Dealer or Quasar may disclose such information to any party as necessary in the ordinary course of business to carry out the purposes for which such information was disclosed to Dealer or Quasar, or as may be required by law. Both parties agree to use reasonable precautions to protect and prevent the unintentional disclosure of such non-public personal information.
21. ANTI-MONEY LAUNDERING PROGRAM. Dealer represents and warrants that it
has adopted an anti-money laundering program ("AML Program") that complies with
the Bank Secrecy Act, as amended by the USA PATRIOT Act, and any future
amendments (the "PATRIOT Act," and together with the Bank Secrecy Act, the
"Act"), the rules and regulations under the Act, and the rules, regulations and
regulatory guidance of the SEC, the NASD or any other applicable self-regulatory
organization (collectively, "AML Rules and Regulations"). Dealer further
represents that its AML Program, at a minimum, (1) designates a compliance
officer to administer and oversee the AML Program, (2) provides ongoing employee
training, (3) includes an independent audit function to test the effectiveness
of the AML Program, (4) establishes internal policies, procedures, and controls
that are tailored to its particular business, (5) will include a customer
identification program consistent with the rules under section 326 of the Act,
(6) provides for the filing of all necessary anti-money laundering reports
including, but not limited to, currency transaction reports and suspicious
activity reports, (7) provides for screening all new and existing customers
against the Office of Foreign Asset Control ("OFAC") list and any other
government list that is or becomes required under the Act, and (8) allows for
appropriate regulators to examine Dealer's AML books and records.
22. MARKET TIMING. Dealer represents that it has and will maintain policies and procedures to detect and prevent any market timing transaction that contravenes the restrictions or prohibitions on market timing, if any, as found in the Funds' Prospectus and/or SAI. Dealer acknowledges that it is responsible for the sales activities of its licensed representatives including, among other things, improper trading activity in violation of the terms and conditions of the Fund's Prospectus.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated as of the day and year first written above.
QUASAR DISTRIBUTORS, LLC
[DEALER]
SCHEDULE A
First American Funds
FIRST AMERICAN INVESTMENT FUNDS, INC. (available share classes)
Equity Index Fund (A, B, C, R, Y)
Small Cap Index Fund (A, B, C, R, Y)
International Fund (A, B, C, R, Y)
Real Estate Securities Fund (A, B, C, R, Y)
Small-Mid Cap Core Fund (A, B, C, Y)
Small Cap Select Fund (A, B, C, R, Y)
Mid Cap Value Fund (A, B, C, R, Y)
Large Cap Growth Opportunities Fund (A, B, C, R, Y)
Balanced Fund (A, B, C, R, Y)
High Income Bond Fund (A, B, C, R, Y)
Core Bond Fund (A, B, C, R, Y)
Intermediate Term Bond Fund (A, Y)
Tax Free Fund (A, C, Y)
California Tax Free Fund (A, C, Y)
Minnesota Tax Free Fund (A, C, Y)
Missouri Tax Free Fund (A, C, Y)
Colorado Intermediate Tax Free Fund (A, Y)
Minnesota Intermediate Tax Free Fund (A, Y)
Ohio Tax Free Fund (A, C, Y)
Mid Cap Index Fund (A, B, C, R, Y)
Small Cap Growth Opportunities Fund (A, B, C, R, Y)
Small Cap Value Fund (A, B, C, R, Y)
Mid Cap Growth Opportunities Fund (A, B, C, R, Y)
Large Cap Select Fund (A, B, C, R, Y)
Large Cap Value Fund (A, B, C, R, Y)
Equity Income Fund (A, B, C, R, Y)
U.S. Government Mortgage Fund (A, B, C, R, Y)
Total Return Bond Fund (A, B, C, R, Y)
Short Term Bond Fund (A, Y)
Arizona Tax Free Fund (A, C, Y)
Colorado Tax Free Fund (A, C, Y)
Nebraska Tax Free Fund (A, C, Y)
California Intermediate Tax Free Fund (A, Y)
Intermediate Tax Free Fund (A, Y)
Oregon Intermediate Tax Free Fund (A, Y)
Intermediate Government Bond Fund (A, Y)
Short Tax Free Fund (A, Y)
Inflation Protected Securities Fund (A, C, R, Y)
FIRST AMERICAN FUNDS, INC. (available share classes)
Prime Obligations Fund (A, B, C, Y)
Tax Free Obligations Fund (A, Y)
FIRST AMERICAN STRATEGY FUNDS, INC. (available share classes)
Strategy Income Allocation Fund (A, B, C, R, Y)
Strategy Growth Allocation Fund (A, B, C, R, Y)
Income Builder Fund (A, B, C, Y)
Strategy Growth and Income Allocation Fund (A, B, C, R, Y)
Strategy Aggressive Growth Allocation Fund (A, B, C, R, Y)
Exhibit 99(g)(1)
CUSTODY AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of July, 2006, by and between FIRST AMERICAN INVESTMENT FUNDS, INC., a Maryland corporation (the "Fund"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America with its principal place of business at Cincinnati, Ohio (the "Custodian").
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is authorized to issue shares of beneficial interest in separate series, with each such series representing interests in a separate portfolio of securities and other assets;
WHEREAS, the Custodian is a bank having the qualifications prescribed in
Section 26(a)(1) of the 1940 Act;
WHEREAS, the Fund desires to retain the Custodian to act as custodian of the cash and securities of each series of the Fund listed on Exhibit C hereto (as amended from time to time) (individually and collectively, the "Series"); and
WHEREAS, the Board of Directors of the Fund (the "Board") has delegated to the Custodian the responsibilities set forth in Rule 17f-5(c) under the 1940 Act and the Custodian is willing to undertake the responsibilities and serve as the foreign custody manager for the Fund.
NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings set forth below unless the context otherwise requires:
1.1 "Authorized Person" means any Officer or other person duly authorized by resolution of the Board to give Oral Instructions and Written Instructions on behalf of the Series named in the resolution of the Board, certified by an Officer and attached hereto as Exhibit A, or in any subsequent resolution of the Board, certified by an Officers, as may be received by the Custodian from time to time.
1.2 "Board" shall mean the directors from time to time serving under the Fund's articles of incorporation, as amended from time to time.
1.3 "Book-Entry System" shall mean a federal book-entry system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of 31 CFR Part 350, or in such book-entry regulations of federal agencies as are substantially in the form of such Subpart O.
1.4 "Business Day" shall mean any day recognized as a settlement day by The New York Stock Exchange, Inc., and any other day for which the Fund computes the net asset value of Shares of the Series.
1.5 "Eligible Foreign Custodian" has the meaning set forth in Rule 17f-5(a)(1), including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the SEC), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository.
1.6 "Eligible Securities Depository" shall mean a system for the central handling of securities as that term is defined in Rule 17f-4 and 17f-7 under the 1940 Act.
1.7 "Foreign Securities" means any of the Series investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Series' transactions in such investments.
1.8 "Series Custody Account" shall mean any of the accounts in the name of the Fund, which is provided for in Section 3.2 below.
1.9 "IRS" shall mean the Internal Revenue Service.
1.10 "NASD" shall mean The National Association of Securities Dealers, Inc.
1.11 "Officer" shall mean the Chairman, President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer of the Fund.
1.12 "Oral Instructions" shall mean instructions orally transmitted to and accepted by the Custodian because such instructions are: (i) reasonably believed by the Custodian to have been given by any two Authorized Persons, (ii) recorded and kept among the records of the Custodian made in the ordinary course of business, and (iii) orally confirmed by the Custodian. The Fund shall cause all Oral Instructions to be confirmed by Written Instructions prior to the end of the next Business Day. If such Written Instructions confirming Oral Instructions are not received by the Custodian prior to a transaction, it shall in no way affect the validity of the transaction or the authorization thereof by the Fund. If Oral Instructions vary from the Written Instructions that purport to confirm them, the Custodian shall notify the Fund of such variance but such Oral Instructions will govern unless the Custodian has not yet acted.
1.13 "Proper Instructions" shall mean Oral Instructions or Written Instructions.
1.14 "SEC" shall mean the Securities and Exchange Commission.
1.15 "Securities" shall include, without limitation, common and preferred stocks, bonds, call options, put options, debentures, notes, bank certificates of deposit, bankers' acceptances, mortgage-backed securities or other obligations, and any certificates, receipts, warrants or other instruments or documents representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interests therein, or any similar property or assets that the Custodian or its agents have the facilities to clear and service.
1.16 "Securities Depository" shall mean The Depository Trust Company and any other clearing agency registered with the SEC under Section 17A of the Securities Exchange Act of 1934, as amended (the "1934 Act"), which acts as a system for the central handling of Securities where all Securities of any particular class or series of an issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of the Securities.
1.17 "Shares" shall mean, with respect to a Series, the units of beneficial interest issued by the Fund on account of the Series.
1.18 "Sub-Custodian" shall mean and include (i) any branch of a "U.S.
bank," as that term is defined in Rule 17f-5 under the 1940 Act, and
(ii) any "Eligible Foreign Custodian" having a contract with the
Custodian, or its agent, which the Custodian has determined will
provide reasonable care of assets of the Series based on the standards
specified in Section 3.3 below. Such contract shall be in writing and
shall include provisions that provide: (i) for indemnification or
insurance arrangements (or any combination of the foregoing) such that
the Series will be adequately protected against the risk of loss of
assets held in accordance with such contract; (ii) that the Foreign
Securities will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the Sub-Custodian or
its creditors except a claim of payment for their safe custody or
administration, in the case of cash deposits, liens or rights in favor
of creditors of the Sub-Custodian arising under bankruptcy,
insolvency, or similar laws; (iii) that beneficial ownership for the
Foreign Securities will be freely transferable without the payment of
money or value other than for safe custody or administration; (iv)
that adequate records will be maintained identifying the assets as
belonging to the Series or as being held by a third party for the
benefit of the Series; (v) that the Series' independent public
accountants will be given access to those records or confirmation of
the contents of those records; and (vi) that the Series will receive
periodic reports with respect to the safekeeping of the Series'
assets, including, but not limited to, notification of any transfer to
or from a Series' account or a third party account containing assets
held for the benefit of the Series. Such contract may contain, in lieu
of any or all of the provisions specified in (i)-(vi) above, such
other provisions that the Custodian determines will provide, in their
entirety, the same or a greater level of care and protection for
Series assets as the specified provisions.
1.19 "Written Instructions" shall mean (i) written communications actually
received by the Custodian and signed by any two Authorized Persons,
(ii) communications by telex or any other such system from one or more
persons reasonably believed by the Custodian to be Authorized Persons,
or (iii) communications between electro-mechanical or electronic
devices provided that the use of such devices and the procedures for
the use thereof shall have been approved by resolutions of the Board,
a copy of which, certified by an Officer, shall have been delivered to
the Custodian.
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 Appointment. The Fund hereby appoints the Custodian as custodian of all Securities and cash owned by or in the possession of the Series at any time during the period of this Agreement, on the terms and conditions set forth in this Agreement, and the Custodian hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement. The Fund hereby delegates to the Custodian, subject to Rule 17f-5(b), the responsibilities with respect to the Series' Foreign Securities, and the Custodian hereby accepts such delegation as foreign custody manager with respect to the Series. The services and duties of the Custodian shall be confined to those matters expressly set forth herein, and no implied duties are assumed by or may be asserted against the Custodian hereunder.
2.2 Documents to be Furnished. The following documents, including any amendments thereto, will be provided contemporaneously with the execution of the Agreement to the Custodian by the Fund:
(a) A copy of the Fund's articles of incorporation, certified by the Secretary;
(b) A copy of the Fund's bylaws, certified by the Secretary;
(c) A copy of the resolution of the Board appointing the Custodian, certified by the Secretary;
(d) A copy of the current prospectus of the Series (the "Prospectus");
(e) A certification of the Chairman, the President, or the Secretary of the Fund setting forth the names and signatures of the current Officers of the Fund and other Authorized Persons; and
(f) An executed authorization required by the Shareholder Communications Act of 1985, attached hereto as Exhibit E.
2.3 Notice of Appointment of Transfer Agent. The Fund agrees to notify the Custodian in writing of the appointment, termination or change in appointment of any transfer agent of the Series.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 Segregation. All Securities and non-cash property held by the Custodian for the account of the Series (other than Securities maintained in a Securities Depository, Eligible Securities Depository or Book-Entry System) shall be physically segregated from other Securities and non-cash property in the possession of the Custodian (including the Securities and non-cash property of the other series of the Fund, if applicable) and shall be identified as subject to this Agreement.
3.2 Series Custody Accounts. As to each Series, the Custodian shall open and maintain in its trust department a custody account in the name of the Fund coupled with the name of the Series, subject only to draft or order of the Custodian, in which the Custodian shall enter and carry all Securities, cash and other assets of such Series which are delivered to it.
3.3 Appointment of Agents.
(a) In its discretion, the Custodian may appoint one or more Sub-Custodians to establish and maintain arrangements with (i) Eligible Securities Depositories or (ii) Eligible Foreign Custodians who are members of the Sub-Custodian's network to hold Securities and cash of the Series and to carry out such other provisions of this Agreement as it may determine; provided, however, that the appointment of any such agents and maintenance of any Securities and cash of the Series shall be at the Custodian's expense and shall not relieve the Custodian of any of its obligations or liabilities under this Agreement. The Custodian shall be liable for the actions of any Sub-Custodians (regardless of whether assets are maintained in the custody of a Sub-Custodian, a member of its network or an Eligible Securities Depository) appointed by it as if such actions had been done by the Custodian.
(b) If, after the initial appointment of Sub-Custodians by the Board in connection with this Agreement, the Custodian wishes to appoint other Sub-Custodians to hold property of the Series, it will so notify the Fund and make the necessary determinations as to any such new Sub-Custodian's eligibility under Rule 17f-5 under the 1940 Act.
(c) In performing its delegated responsibilities as foreign custody manager to place or maintain the Series' assets with a Sub-Custodian, the Custodian will determine that the Series' assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Series' assets will be held by that Sub-Custodian, after considering all factors relevant to safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1).
(d) The agreement between the Custodian and each Sub-Custodian acting hereunder shall contain the required provisions set forth in Rule 17f-5(c)(2) under the 1940 Act.
(e) At the end of each calendar quarter, the Custodian shall provide written reports notifying the Board of the withdrawal or placement of the Securities and cash of the Series with a Sub-Custodian and of any material changes in the Series' arrangements. Such reports shall include an analysis of the custody risks associated with maintaining assets with any Eligible Securities Depositories. The Custodian shall promptly take such steps as may be required to withdraw assets of the Series from any Sub-Custodian arrangement that has ceased to meet the requirements of Rule 17f-5 or Rule 17f-7 under the 1940 Act, as applicable.
(f) With respect to its responsibilities under this Section 3.3, the Custodian hereby warrants to the Fund that it agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of property of the Series. The Custodian further warrants that the Series' assets will be subject to reasonable care if maintained with a Sub-Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation: (i) the Sub-Custodian's practices, procedures, and internal controls for certificated securities (if applicable), its method of keeping custodial records, and its security and data protection practices; (ii) whether the Sub-Custodian has the requisite financial strength to provide reasonable care for Series assets; (iii) the Sub-Custodian's general reputation and standing and, in the case of a Securities Depository, the Securities Depository's operating history and number of participants; and (iv) whether the Series will have jurisdiction over and be able to enforce judgments against the Sub-Custodian, such as by virtue of the existence of any offices of the Sub-Custodian in the United States or the Sub-Custodian's consent to service of process in the United States.
(g) The Custodian shall establish a system or ensure that its Sub-Custodian has established a system to monitor on a continuing basis (i) the appropriateness of maintaining the Series' assets with a Sub-Custodian or Eligible Foreign Custodians who are members of a Sub-Custodian's network; (ii) the performance of the contract governing the Series' arrangements with such Sub-Custodian or Eligible Foreign Custodian's members of a Sub-Custodian's network; and (iii) the custody risks of maintaining assets with an Eligible Securities Depository. The Custodian must promptly notify the Series or its investment adviser of any material change in these risks.
(h) The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to Foreign Securities to which the Series shall be entitled and shall credit such income, as collected, to the Fund. In the event that extraordinary measures are required to collect such income, the Fund and Custodian shall consult as to the measurers and as to the compensation and expenses of the Custodian relating to such measures.
3.4 Delivery of Assets to Custodian. The Fund shall deliver, or cause to be delivered, to the Custodian all of the Series' Securities, cash and other investment assets, including (i) all payments of income, payments of principal and capital distributions received by the Series with respect to such Securities, cash or other assets owned by the Series at any time during the period of this Agreement, and (ii) all cash received by the Series for the issuance of Shares. The Custodian shall not be responsible for such Securities, cash or other assets until actually received by it.
3.5 Securities Depositories and Book-Entry Systems. The Custodian may deposit and/or maintain Securities of the Series in a Securities Depository or in a Book-Entry System, subject to the following provisions:
(a) The Custodian, on an on-going basis, shall deposit in a Securities Depository or Book-Entry System all Securities eligible for deposit therein and shall make use of such Securities Depository or Book-Entry System to the extent possible and practical in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities, and deliveries and returns of collateral consisting of Securities.
(b) Securities of the Series kept in a Book-Entry System or Securities Depository shall be kept in an account ("Depository Account") of the Custodian in such Book-Entry System or Securities Depository which includes only assets held by the Custodian as a fiduciary, custodian or otherwise for customers.
(c) The records of the Custodian with respect to Securities of the Series maintained in a Book-Entry System or Securities Depository shall, by book-entry, identify such Securities as belonging to the Series.
(d) If Securities purchased by the Series are to be held in a Book-Entry System or Securities Depository, the Custodian shall pay for such Securities upon (i) receipt of advice from the Book-Entry System or Securities Depository that such Securities have been transferred to the Depository Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Series. If Securities sold by the Series are held in a Book-Entry System or Securities Depository, the Custodian shall transfer such Securities upon (i) receipt of advice from the Book-Entry System or Securities Depository that payment for such Securities has been transferred to the Depository Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Series.
(e) The Custodian shall provide the Fund with copies of any report (obtained by the Custodian from a Book-Entry System or Securities Depository in which Securities of the Series are kept) on the internal accounting controls and procedures for safeguarding Securities deposited in such Book-Entry System or Securities Depository.
(f) Notwithstanding anything to the contrary in this Agreement, the
Custodian shall be liable to the Fund for any loss or damage to
the Series resulting from (i) the use of a Book-Entry System or
Securities Depository by reason of any negligence or willful
misconduct on the part of the Custodian or any Sub-Custodian, or
(ii) failure of the Custodian or any Sub-Custodian to enforce
effectively such rights as it may have against a Book-Entry
System or Securities Depository. At its election, the Fund shall
be subrogated to the rights of the Custodian with respect to any
claim against a Book-Entry System or Securities Depository or any
other person from any loss or damage to the Series arising from
the use of such Book-Entry System or Securities Depository, if
and to the extent that the Series has not been made whole for any
such loss or damage.
(g) With respect to its responsibilities under this Section 3.5 and pursuant to Rule 17f-4 under the 1940 Act, the Custodian hereby warrants to the Fund that it agrees to (i) exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain such assets, (ii) provide, promptly upon request by the Fund, such reports as are available concerning the Custodian's internal accounting controls and financial strength, and (iii) require any Sub-Custodian to exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain assets corresponding to the security entitlements of its entitlement holders.
3.6 Disbursement of Moneys from Series Custody Account. Upon receipt of Proper Instructions, the Custodian shall disburse moneys from the Series Custody Account but only in the following cases:
(a) For the purchase of Securities for the Series but only in
accordance with Section 4.1 of this Agreement and only (i) in the
case of Securities (other than options on Securities, futures
contracts and options on futures contracts), against the delivery
to the Custodian (or any Sub-Custodian) of such Securities
registered as provided in Section 3.9 below or in proper form for
transfer, or if the purchase of such Securities is effected
through a Book-Entry System or Securities Depository, in
accordance with the conditions set forth in Section 3.5 above;
(ii) in the case of options on Securities, against delivery to
the Custodian (or any Sub-Custodian) of such receipts as are
required by the customs prevailing among dealers in such options;
(iii) in the case of futures contracts and options on futures
contracts, against delivery to the Custodian (or any
Sub-Custodian) of evidence of title thereto in favor of the
Series or any nominee referred to in Section 3.9 below; and (iv)
in the case of repurchase or reverse repurchase agreements
entered into between the Fund and a bank which is a member of the
Federal Reserve System or between the Fund and a primary dealer
in U.S. Government securities, against delivery of the purchased
Securities either in certificate form or through an entry
crediting the Custodian's account at a Book-Entry System or
Securities Depository with such Securities;
(b) In connection with the conversion, exchange or surrender, as set forth in Section 3.7(f) below, of Securities owned by the Series;
(c) For the payment of any dividends or capital gain distributions declared by the Series;
(d) In payment of the redemption price of Shares as provided in
Section 5.1 below;
(e) For the payment of any expense or liability incurred by the Series, including, but not limited to, the following payments for the account of the Series: interest; taxes; administration, investment advisory, accounting, auditing, transfer agent, custodian, director and legal fees; and other operating expenses of the Series; in all cases, whether or not such expenses are to be in whole or in part capitalized or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of the NASD, relating to compliance with rules of the Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions by the Series;
(g) For transfer in accordance with the provisions of any agreement among the Fund, the Custodian and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding account deposits in connection with transactions by the Series;
(h) For the funding of any uncertificated time deposit or other interest-bearing account with any banking institution (including the Custodian), which deposit or account has a term of one year or less; and
(i) For any other proper purpose, but only upon receipt, in addition to Proper Instructions, of a copy of a resolution of the Board, certified by an Officer, specifying the amount and purpose of such payment, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom such payment is to be made.
3.7 Delivery of Securities from Series Custody Account. Upon receipt of Proper Instructions, the Custodian shall release and deliver, or cause the Sub-Custodian to release and deliver, Securities from the Series Custody Account but only in the following cases:
(a) Upon the sale of Securities for the account of the Series but only against receipt of payment therefor in cash, by certified or cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry System or
Securities Depository, in accordance with the provisions of
Section 3.5 above;
(c) To an offeror's depository agent in connection with tender or other similar offers for Securities of the Series; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian;
(d) To the issuer thereof or its agent (i) for transfer into the name of the Series, the Custodian or any Sub-Custodian, or any nominee or nominees of any of the foregoing, or (ii) for exchange for a different number of certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new Securities are to be delivered to the Custodian;
(e) To the broker selling the Securities, for examination in accordance with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the issuer of such Securities, or pursuant to provisions for conversion contained in such Securities, or pursuant to any deposit agreement, including surrender or receipt of underlying Securities in connection with the issuance or cancellation of depository receipts; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian;
(g) Upon receipt of payment therefor pursuant to any repurchase or reverse repurchase agreement entered into by the Series;
(h) In the case of warrants, rights or similar Securities, upon the exercise thereof, provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian;
(i) For delivery in connection with any loans of Securities of the Series, but only against receipt of such collateral as the Fund shall have specified to the Custodian in Proper Instructions;
(j) For delivery as security in connection with any borrowings by the Series requiring a pledge of assets by the Fund, but only against receipt by the Custodian of the amounts borrowed;
(k) Pursuant to any authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund;
(l) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of the NASD, relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions by the Series;
(m) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding account deposits in connection with transactions by the Series;
(n) For any other proper corporate purpose, but only upon receipt, in addition to Proper Instructions, of a copy of a resolution of the Board, certified by an Officer, specifying the Securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such Securities shall be made; or
(o) To brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct.
3.8 Actions Not Requiring Proper Instructions. Unless otherwise instructed by the Fund, the Custodian shall with respect to all Securities held for the Series:
(a) Subject to Section 9.4 below, collect on a timely basis all income and other payments to which the Series is entitled either by law or pursuant to custom in the securities business;
(b) Present for payment and, subject to Section 9.4 below, collect on a timely basis the amount payable upon all Securities which may mature or be called, redeemed, or retired, or otherwise become payable;
(c) Endorse for collection, in the name of the Series, checks, drafts and other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form for Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates of ownership under the federal income tax laws or the laws or regulations of any other taxing authority now or hereafter in effect, and prepare and submit reports to the IRS and the Fund at such time, in such manner and containing such information as is prescribed by the IRS;
(f) Hold for the Series, either directly or, with respect to Securities held therein, through a Book-Entry System or Securities Depository, all rights and similar Securities issued with respect to Securities of the Series; and
(g) In general, and except as otherwise directed in Proper Instructions, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with Securities and other assets of the Series.
3.9 Registration and Transfer of Securities. All Securities held for the Series that are issued or issuable only in bearer form shall be held by the Custodian in that form, provided that any such Securities shall be held in a Book-Entry System if eligible therefor. All other Securities held for the Series may be registered in the name of the Series, the Custodian, a Sub-Custodian or any nominee thereof, or in the name of a Book-Entry System, Securities Depository or any nominee of either thereof. The records of the Custodian with respect to foreign securities of the Series that are maintained with a Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers shall identify those securities as belonging to the Series. The Fund shall furnish to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of any of the nominees referred to above or in the name of a Book-Entry System or Securities Depository, any Securities registered in the name of the Series.
3.10 Records.
(a) The Custodian shall maintain complete and accurate records with
respect to Securities, cash or other property held for the
Series, including (i) journals or other records of original entry
containing an itemized daily record in detail of all receipts and
deliveries of Securities and all receipts and disbursements of
cash; (ii) ledgers (or other records) reflecting (A) Securities
in transfer, (B) Securities in physical possession, (C) monies
and Securities borrowed and monies and Securities loaned
(together with a record of the collateral therefor and
substitutions of such collateral), (D) dividends and interest
received, and (E) dividends receivable and interest receivable;
(iii) canceled checks and bank records related thereto; and (iv)
all records relating to its activities and obligations under this
Agreement. The Custodian shall keep such other books and records
of the Series as the Fund shall reasonably request, or as may be
required by the 1940 Act, including, but not limited to, Section
31 of the 1940 Act and Rule 31a-2 promulgated thereunder.
(b) All such books and records maintained by the Custodian shall (i) be maintained in a form acceptable to the Fund and in compliance with the rules and regulations of the SEC, (ii) be the property of the Fund and at all times during the regular business hours of the Custodian be made available upon request for inspection by duly authorized officers, employees or agents of the Fund and employees or agents of the SEC, and (iii) if required to be maintained by Rule 31a-1 under the 1940 Act, be preserved for the periods prescribed in Rules 31a-1 and 31a-2 under the 1940 Act.
3.11 Series Reports by Custodian. The Custodian shall furnish the Fund with a daily activity statement and a summary of all transfers to or from each Series Custody Account on the day following such transfers. At least monthly, the Custodian shall furnish the Fund with a detailed statement of the Securities and moneys held by the Custodian and the Sub-Custodians for the Series under this Agreement.
3.12 Other Reports by Custodian. As the Fund may reasonably request from time to time, the Custodian shall provide the Fund with reports on the internal accounting controls and procedures for safeguarding Securities which are employed by the Custodian or any Sub-Custodian.
3.13 Proxies and Other Materials. The Custodian shall cause all proxies relating to Securities which are not registered in the name of the Series to be promptly executed by the registered holder of such Securities, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such Securities. With respect to the Foreign Securities, the Custodian will use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights.
3.14 Information on Corporate Actions. The Custodian shall promptly deliver to the Fund all information received by the Custodian and pertaining to Securities being held by the Series with respect to optional tender or exchange offers, calls for redemption or purchase, or expiration of rights as described in the Standards of Service Guide attached as Exhibit B. If the Fund desires to take action with respect to any tender offer, exchange offer or other similar transaction, the Fund shall notify the Custodian at least five Business Days prior to the date on which the Custodian is to take such action. The Fund will provide or cause to be provided to the Custodian all relevant information for any Security which has unique put/option provisions at least five Business Days prior to the beginning date of the tender period.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE SERIES
4.1 Purchase of Securities. Promptly upon each purchase of Securities for the Series, Written Instructions shall be delivered to the Custodian, specifying (i) the name of the issuer or writer of such Securities, and the title or other description thereof, (ii) the number of shares, principal amount (and accrued interest, if any) or other units purchased, (iii) the date of purchase and settlement, (iv) the purchase price per unit, (v) the total amount payable upon such purchase, and (vi) the name of the person to whom such amount is payable. The Custodian shall upon receipt of such Securities purchased by the Series pay out of the moneys held for the account of the Series the total amount specified in such Written Instructions to the person named therein. The Custodian shall not be under any obligation to pay out moneys to cover the cost of a purchase of Securities for the Series, if in the Series Custody Account there is insufficient cash available to the Series for which such purchase was made.
4.2 Liability for Payment in Advance of Receipt of Securities Purchased. In any and every case where payment for the purchase of Securities for the Series is made by the Custodian in advance of receipt of the Securities purchased and in the absence of specified Written Instructions to so pay in advance, the Custodian shall be liable to the Series for such payment.
4.3 Sale of Securities. Promptly upon each sale of Securities by the
Series, Written Instructions shall be delivered to the Custodian,
specifying (i) the name of the issuer or writer of such Securities,
and the title or other description thereof, (ii) the number of shares,
principal amount (and accrued interest, if any), or other units sold,
(iii) the date of sale and settlement, (iv) the sale price per unit,
(v) the total amount payable upon such sale, and (vi) the person to
whom such Securities are to be delivered. Upon receipt of the total
amount payable to the Series as specified in such Written
Instructions, the Custodian shall deliver such Securities to the
person specified in such Written Instructions. Subject to the
foregoing, the Custodian may accept payment in such form as shall be
satisfactory to it, and may deliver Securities and arrange for payment
in accordance with the customs prevailing among dealers in Securities.
4.4 Delivery of Securities Sold. Notwithstanding Section 4.3 above or any other provision of this Agreement, the Custodian, when instructed to deliver Securities against payment, shall be entitled, if in accordance with generally accepted market practice, to deliver such Securities prior to actual receipt of final payment therefor. In any such case, the Series shall bear the risk that final payment for such Securities may not be made or that such Securities may be returned or otherwise held or disposed of by or through the person to whom they were delivered, and the Custodian shall have no liability for any for the foregoing.
4.5 Payment for Securities Sold. In its sole discretion and from time to time, the Custodian may credit the Series Custody Account, prior to actual receipt of final payment thereof, with (i) proceeds from the sale of Securities which it has been instructed to deliver against payment, (ii) proceeds from the redemption of Securities or other assets of the Series, and (iii) income from cash, Securities or other assets of the Series. Any such credit shall be conditional upon actual receipt by Custodian of final payment and may be reversed if final payment is not actually received in full. The Custodian may, in its sole discretion and from time to time, permit the Series to use funds so credited to the Series Custody Account in anticipation of actual receipt of final payment. Any such funds shall be repayable immediately upon demand made by the Custodian at any time prior to the actual receipt of all final payments in anticipation of which funds were credited to the Series Custody Account.
4.6 Advances by Custodian for Settlement. The Custodian may, in its sole discretion and from time to time, advance funds to the Fund to facilitate the settlement of a Series' transactions in the Series Custody Account. Any such advance shall be repayable immediately upon demand made by Custodian.
ARTICLE V
REDEMPTION OF SERIES SHARES
5.1 Transfer of Funds. From such funds as may be available for the purpose in the relevant Series Custody Account, and upon receipt of Proper Instructions specifying that the funds are required to redeem Shares of the Series, the Custodian shall wire each amount specified in such Proper Instructions to or through such bank or broker-dealer as the Fund may designate.
5.2 No Duty Regarding Paying Banks. Once the Custodian has wired amounts to a bank or broker-dealer pursuant to Section 5.1 above, the Custodian shall not be under any obligation to effect any further payment or distribution by such bank or broker-dealer.
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of Proper Instructions, the Custodian shall establish and maintain a segregated account or accounts for and on behalf of the Series, into which account or accounts may be transferred cash and/or Securities, including Securities maintained in a Depository Account:
(a) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Series;
(b) for purposes of segregating cash or Securities in connection with securities options purchased or written by the Series or in connection with financial futures contracts (or options thereon) purchased or sold by the Series;
(c) which constitute collateral for loans of Securities made by the Series;
(d) for purposes of compliance by the Series with requirements under the 1940 Act for the maintenance of segregated accounts by registered investment companies in connection with reverse repurchase agreements and when-issued, delayed delivery and firm commitment transactions; and
(e) for other proper corporate purposes, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board, certified by an Officer, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes.
Each segregated account established under this Article VI shall be established and maintained for the Series only. All Proper Instructions relating to a segregated account shall specify the Series.
ARTICLE VII
COMPENSATION OF CUSTODIAN
The Custodian shall be compensated for providing the services set forth in this Agreement in accordance with the fee schedule set forth on Exhibit D hereto (as amended from time to time). The Custodian shall also be compensated for such out-of-pocket expenses (e.g., telecommunication charges, postage and delivery charges, and reproduction charges) as are reasonably incurred by the Custodian in performing its duties hereunder. The Fund shall pay all such fees and reimbursable expenses within 30 calendar days following receipt of the billing notice, except for any fee or expense subject to a good faith dispute. The Fund shall notify the Custodian in writing within 30 calendar days following receipt of each invoice if the Fund is disputing any amounts in good faith. The Fund shall pay such disputed amounts within 10 calendar days of the day on which the parties agree to the amount to be paid. With the exception of any fee or expense the Fund is disputing in good faith as set forth above, unpaid invoices shall accrue a finance charge of 1 1/2% per month after the due date. Notwithstanding anything to the contrary, amounts owed by the Fund to the Custodian shall only be paid out of the assets and property of the particular Series involved.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties of the Fund. The Fund hereby represents and warrants to the Custodian, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(a) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered by the Fund in accordance with all requisite action and constitutes a valid and legally binding obligation of the Fund, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; and
(c) It is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement.
8.2 Representations and Warranties of the Custodian. The Custodian hereby represents and warrants to the Fund, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(a) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder;
(b) It is a U.S. Bank as defined in section (a)(7) of Rule 17f-5.
(c) This Agreement has been duly authorized, executed and delivered by the Custodian in accordance with all requisite action and constitutes a valid and legally binding obligation of the Custodian, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; and
(d) It is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement.
ARTICLE IX
CONCERNING THE CUSTODIAN
9.1 Standard of Care. The Custodian shall exercise reasonable care in the performance of its duties under this Agreement. The Custodian shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with its duties under this Agreement, except a loss arising out of or relating to the Custodian's (or a Sub-Custodian's) refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement) or from its (or a Sub-Custodian's) bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). The Custodian shall be entitled to rely on and may act upon advice of counsel on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian shall promptly notify the Fund of any action taken or omitted by the Custodian pursuant to advice of counsel.
9.2 Actual Collection Required. The Custodian shall not be liable for, or considered to be the custodian of, any cash belonging to the Series or any money represented by a check, draft or other instrument for the payment of money, until the Custodian or its agents actually receive such cash or collect on such instrument.
9.3 No Responsibility for Title, etc. So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received or delivered by it pursuant to this Agreement.
9.4 Limitation on Duty to Collect. Custodian shall not be required to enforce collection, by legal means or otherwise, of any money or property due and payable with respect to Securities held for the Series if such Securities are in default or payment is not made after due demand or presentation.
9.5 Reliance Upon Documents and Instructions. The Custodian shall be entitled to rely upon any certificate, notice or other instrument in writing received by it and reasonably believed by it to be genuine. The Custodian shall be entitled to rely upon any Oral Instructions and any Written Instructions actually received by it pursuant to this Agreement.
9.6 Cooperation. The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Fund to keep the books of account of the Series and/or compute the value of the assets of the Series. The Custodian shall take all such reasonable actions as the Fund may from time to time request to enable the Fund to obtain, from year to year, favorable opinions from the Fund's independent accountants with respect to the Custodian's activities hereunder in connection with (i) the preparation of the Fund's reports on Form N-1A and Form N-SAR and any other reports required by the SEC, and (ii) the fulfillment by the Fund of any other requirements of the SEC.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification by Fund. The Fund shall indemnify and hold harmless the Custodian, any Sub-Custodian and any nominee thereof (each, an "Indemnified Party" and collectively, the "Indemnified Parties") from and against any and all claims, demands, losses, expenses and liabilities of any and every nature (including reasonable attorneys' fees) that an Indemnified Party may sustain or incur or that may be asserted against an Indemnified Party by any person arising directly or indirectly (i) from the fact that Securities are registered in the name of any such nominee, (ii) from any action taken or omitted to be taken by the Custodian or such Sub-Custodian (a) at the request or direction of or in reliance on the advice of the Fund, or (b) upon Proper Instructions, or (iii) from the performance of its obligations under this Agreement or any sub-custody agreement, provided that neither the Custodian nor any such Sub-Custodian shall be indemnified and held harmless from and against any such claim, demand, loss, expense or liability arising out of or relating to its refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement), or from its bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). This indemnity shall be a continuing obligation of the Fund, its successors and assigns, notwithstanding the termination of this Agreement. As used in this paragraph, the terms "Custodian" and "Sub-Custodian" shall include their respective directors, officers and employees.
10.2 Indemnification by Custodian. The Custodian shall indemnify and hold harmless the Fund from and against any and all claims, demands, losses, expenses, and liabilities of any and every nature (including reasonable attorneys' fees) that the Fund may sustain or incur or that may be asserted against the Fund by any person arising directly or indirectly out of any action taken or omitted to be taken by an Indemnified Party as a result of the Indemnified Party's refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement), or from its bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). This indemnity shall be a continuing obligation of the Custodian, its successors and assigns, notwithstanding the termination of this Agreement. As used in this paragraph, the term "Fund" shall include the Fund's directors, officers and employees.
10.3 Security. If the Custodian advances cash or Securities to the Series for any purpose, either at the Fund's request or as otherwise contemplated in this Agreement, or in the event that the Custodian or its nominee incurs, in connection with its performance under this Agreement, any claim, demand, loss, expense or liability (including reasonable attorneys' fees) (except such as may arise from its or its nominee's bad faith, negligence or willful misconduct), then, in any such event, any property at any time held for the account of the Series shall be security therefor, and should the Series fail promptly to repay or indemnify the Custodian, the Custodian shall be entitled to utilize available cash of such Series and to dispose of other assets of such Series to the extent necessary to obtain reimbursement or indemnification.
10.4 Miscellaneous.
(a) Neither party to this Agreement shall be liable to the other party for consequential, special or punitive damages under any provision of this Agreement.
(b) The indemnity provisions of this Article shall indefinitely survive the termination and/or assignment of this Agreement.
(c) In order that the indemnification provisions contained in this Article shall apply, it is understood that if in any case the indemnitor may be asked to indemnify or hold the indemnitee harmless, the indemnitor shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the indemnitee will use all reasonable care to notify the indemnitor promptly concerning any situation that presents or appears likely to present the probability of a claim for indemnification. The indemnitor shall have the option to defend the indemnitee against any claim that may be the subject of this indemnification. In the event that the indemnitor so elects, it will so notify the indemnitee and thereupon the indemnitor shall take over complete defense of the claim, and the indemnitee shall in such situation initiate no further legal or other expenses for which it shall seek indemnification under this section. The indemnitee shall in no case confess any claim or make any compromise in any case in which the indemnitor will be asked to indemnify the indemnitee except with the indemnitor's prior written consent.
ARTICLE XI
FORCE MAJEURE
Neither the Custodian nor the Fund shall be liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; acts of terrorism; sabotage; strikes; epidemics; riots; power failures; computer failure and any such circumstances beyond its reasonable control as may cause interruption, loss or malfunction of utility, transportation, computer (hardware or software) or telephone communication service; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation; provided, however, that in the event of a failure or delay, the Custodian (i) shall not discriminate against the Series in favor of any other customer of the Custodian in making computer time and personnel available to input or process the transactions contemplated by this Agreement, and (ii) shall use its best efforts to ameliorate the effects of any such failure or delay.
ARTICLE XII
PROPRIETARY AND CONFIDENTIAL INFORMATION
The Custodian agrees on behalf of itself and its directors, officers, and employees to treat confidentially and as proprietary information of the Fund, all records and other information relative to the Fund and prior, present, or potential shareholders of the Fund (and clients of said shareholders), and not to use such records and information for any purpose other than the performance of its responsibilities and duties hereunder, except (i) after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where the Custodian may be exposed to civil or criminal contempt proceedings for failure to comply, (ii) when requested to divulge such information by duly constituted authorities, or (iii) when so requested by the Fund. Records and other information which have become known to the public through no wrongful act of the Custodian or any of its employees, agents or representatives, and information that was already in the possession of the Custodian prior to receipt thereof from the Fund or its agent, shall not be subject to this paragraph.
Further, the Custodian will adhere to the privacy policies adopted by the Fund pursuant to Title V of the Gramm-Leach-Bliley Act, as may be modified from time to time. In this regard, the Custodian shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of, records and information relating to the Fund and its shareholders.
ARTICLE XIII
EFFECTIVE PERIOD; TERMINATION
13.1 Effective Period. This Agreement shall become effective as of the date first written above and will continue in effect for a period of one year.
13.2 Termination. Subsequent to the initial one-year term, this Agreement may be terminated by either party upon giving 90 days prior written notice to the other party or such shorter period as is mutually agreed upon by the parties. Notwithstanding the foregoing, this Agreement may be terminated by any party upon the breach of the other party of any material term of this Agreement if such breach is not cured within 15 days of notice of such breach to the breaching party. In addition, the Fund may, at any time, immediately terminate this Agreement in the event of the appointment of a conservator or receiver for the Custodian by regulatory authorities or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction.
13.3 Appointment of Successor Custodian. If a successor custodian shall have been appointed by the Board, the Custodian shall, upon receipt of a notice of acceptance by the successor custodian, on such specified date of termination (i) deliver directly to the successor custodian all Securities (other than Securities held in a Book-Entry System or Securities Depository) and cash then owned by the Series and held by the Custodian as custodian, and (ii) transfer any Securities held in a Book-Entry System or Securities Depository to an account of or for the
benefit of the Series at the successor custodian, provided that the Fund shall have paid to the Custodian all fees, expenses and other amounts to the payment or reimbursement of which it shall then be entitled. In addition, the Custodian shall, at the expense of the Fund, transfer to such successor all relevant books, records, correspondence, and other data established or maintained by the Custodian under this Agreement in a form reasonably acceptable to the Fund (if such form differs from the form in which the Custodian has maintained the same, the Fund shall pay any expenses associated with transferring the data to such form), and will cooperate in the transfer of such duties and responsibilities, including provision for assistance from the Custodian's personnel in the establishment of books, records, and other data by such successor. Upon such delivery and transfer, the Custodian shall be relieved of all obligations under this Agreement.
13.4 Failure to Appoint Successor Custodian. If a successor custodian is not designated by the Fund on or before the date of termination of this Agreement, then the Custodian shall have the right to deliver to a bank or trust company of its own selection, which bank or trust company (i) is a "bank" as defined in the 1940 Act, and (ii) has aggregate capital, surplus and undivided profits as shown on its most recent published report of not less than $25 million, all Securities, cash and other property held by Custodian under this Agreement and to transfer to an account of or for the Series at such bank or trust company all Securities of the Series held in a Book-Entry System or Securities Depository. Upon such delivery and transfer, such bank or trust company shall be the successor custodian under this Agreement and the Custodian shall be relieved of all obligations under this Agreement. In addition, under these circumstances, all books, records and other data of the Fund shall be returned to the Fund.
ARTICLE XIV
MISCELLANEOUS
14.1 Compliance with Laws. The Fund has and retains primary responsibility for all compliance matters relating to the Series, including but not limited to compliance with the 1940 Act, the Internal Revenue Code of 1986, the Sarbanes-Oxley Act of 2002, the USA Patriot Act of 2002 and the policies and limitations of the Series relating to its portfolio investments as set forth in its Prospectus and statement of additional information. The Custodian's services hereunder shall not relieve the Fund of its responsibilities for assuring such compliance or the Board's oversight responsibility with respect thereto.
14.2 Amendment. This Agreement may not be amended or modified in any manner except by written agreement executed by the Custodian and the Fund, and authorized or approved by the Board.
14.3 Assignment. This Agreement shall extend to and be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of the Custodian, or by the Custodian without the written consent of the Fund accompanied by the authorization or approval of the Board.
14.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without regard to conflicts of law principles. To the extent that the applicable laws of the State of Ohio, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control, and nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or order of the SEC thereunder.
14.5 No Agency Relationship. Nothing herein contained shall be deemed to authorize or empower either party to act as agent for the other party to this Agreement, or to conduct business in the name, or for the account, of the other party to this Agreement.
14.6 Services Not Exclusive. Nothing in this Agreement shall limit or restrict the Custodian from providing services to other parties that are similar or identical to some or all of the services provided hereunder.
14.7 Invalidity. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties.
14.8 Notices. Any notice required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been given on the date delivered personally or by courier service, or three days after sent by registered or certified mail, postage prepaid, return receipt requested, or on the date sent and confirmed received by facsimile transmission to the other party's address set forth below:
Notice to the Custodian shall be sent to:
U.S. Bank National Association
425 Walnut Street, M.L. CN-OH-W6TC
Cincinnati, Ohio 45202
Attention: Mutual Fund Custody Services
Facsimile: (651) 767-9164
and notice to the Fund shall be sent to:
First American Investment Funds, Inc.
800 Nicollet Mall, BC-MN-H05O
Minneapolis, Minnesota 55402
Attention: Mutual Fund Client Services
Facsimile: (612) 303-4257
14.9 Multiple Originals. This Agreement may be executed on two or more counterparts, each of which when so executed shall be deemed an original, but such counterparts shall together constitute but one and the same instrument.
14.10 No Waiver. No failure by either party hereto to exercise, and no delay by such party in exercising, any right hereunder shall operate as a waiver thereof. The exercise by either party hereto of any right hereunder shall not preclude the exercise of any other right, and the remedies provided herein are cumulative and not exclusive of any remedies provided at law or in equity.
14.11 References to Custodian. The Fund shall not circulate any printed matter which contains any reference to Custodian without the prior written approval of Custodian, excepting printed matter contained in the prospectus or statement of additional information for the Series and such other printed matter as merely identifies Custodian as custodian for the Series. The Fund shall submit printed matter requiring approval to Custodian in draft form, allowing sufficient time for review by Custodian and its counsel prior to any deadline for printing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer on one or more counterparts as of the date first above written.
FIRST AMERICAN INVESTMENT FUNDS, INC. U.S. BANK NATIONAL ASSOCIATION
By: /s/ Jeffery M. Wilson By: /s/ Michael R. McVoy
------------------------------------ --------------------------------
Jeffery M. Wilson Michael R. McVoy
Title: Vice President Administration Title: Vice President
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EXHIBIT A
CERTIFICATE OF CORPORATE SECRETARY
OF
FIRST AMERICAN FUNDS, INC. (FAF)
FIRST AMERICAN INVESTMENT FUNDS, INC. (FAIF)
(COLLECTIVELY, THE "FIRST AMERICAN FUNDS")
I, Kathleen L. Prudhomme, being the Secretary of the First American Funds, do hereby certify that the following resolutions were duly adopted at a meeting of the board of directors of the First American Funds on June 21, 2006, and that no action has been taken to rescind or amend the following resolutions and they remain in full force and effect:
Authorized Persons (Open-End Funds)
RESOLVED, that in connection with the purchase or sale of any securities on behalf of any portfolio of FAF, FAIF, FASF, and Mount Vernon Securities Lending Trust, each broker-dealer through which any such portfolio proposes to execute transactions, as well as the Custodian or any Sub-Custodian, as custodian, hereby is authorized to act on the written, telephoned or telegraphed instructions of any one of the following persons, each of whom is authorized to issue Proper Instructions as defined in the Custodian Agreement or any Sub-Custodian Agreement; provided, that all telephone or telegraphed instructions are confirmed in writing; and provided, further, that the employees of J.P. Morgan Investment Management Inc. named below are authorized to give instructions only with respect to FAIF's International Fund, and only during the respective periods in which such firms act as sub-advisor to such Fund:
U.S. Bank National Association and FAF Advisors, Inc.
Derek Bloom
Karen Bowie
Bridget Braun
Gerry Bren
Brenda Briceno
Laura Brunner
Tony Burger
Andrew Burlet
Emil Busse
Mike Butala
Greg Carlson
David Chalupnik
David Cline
Pam Coleman
Matt Corbett
Jeff Danforth
Vickie Dehn
Ken Delecki
Jim Diedrich
John Dikeman
Ronald Dowd
Mark Dowling
Chris Drahn
Kevin Earley
Jeff Ebert
Hector Fernandez
Walt French
David Friar
John Fruit
Chuck Gariboldi
Mark Gierach
Scott Gira
Harold Goldstein
Tom Gunderson
Mike Hamilton
Greg Hanson
Doug Hedberg
Kathy Heltemes
Keith Hembre
Mark Hesse-Withbroe
Joe Holinka
Troy Huff
Cori Johnson
David Johnson
Mark Jordahl
Ken Kaufmann
Chad Kemper
Amit Kumar
Wan-Chong Kung
Patricia Lawson
Jon Loth
Mike Luoma
Tom Mahowald
Michael Manning
Ruth Mattson
Robert McDougall
Sean McLeod
Brent Mellum
Cindy Moore
Scott Mullinix
Jessica Murray
Nick Negrini
Tim Nelson
Chris Neuharth
Marie Newcome
Andy O'Brien
Jason O'Brien
Josh Overholt
Jim Palmer
Tim Palmer
Mike Paone
Maria Peterson
Jeff Plotnik
Lucille Rehkamp
Tony Rodriguez
Dennis Roebel
Jay Rosenberg
Tim Russell
Asitha Sandanayake
Linda Sauber
Jeff Schmitz
Thomas Schreier
Todd Schwartz
Travis Sell
Neal Shah
Terry Sloan
Jane Snorek
Tanya Spencer
Allen Steinkopf
Catherine Stienstra
Bridget Stier
Shaista Tajamal
Joe Ulrey
Mandi Wagener
Stacie Weiss
Mike Welle
John Wenker
Marta Wenker
Doug White
Jeffery Wilson
Ben Woo
U.S. Bancorp Fund Services, LLC
Jim Arnold
Todd Bares
Jennifer Hayden
Lori Kohlhapp
Joe Redwine
Paul Stuempfig
Brian Wiedmeyer
Jim Zawada
J.P. Morgan Investment Management Inc. (FAIF International Fund)
Jim Andrews
Daemon Bear
Lee Bray
Nick Bundy
Mark Burlison
Alan Court
Sue Dewhurst
James Fisher
Jeremy Griggs
Sean Hennelly
Russell Lowe
Nigel Manning
Tom Murray
Anish Patel
Sarah Smith
RESOLVED, FURTHER, that the Brokers may deal with any and all of the above-named and described persons as though they were dealing with the Fund(s) directly.
RESOLVED, FURTHER, that no limitations are imposed upon the above authorities.
RESOLVED, FURTHER, that the Secretary of the Funds be, and hereby is, authorized, empowered and directed to certify to the Broker:
(a) a true copy of these resolutions;
(b) specimen signatures of each and every person by these resolutions empowered; and
(c) a certificate that the Funds are duly organized and existing, that their Articles of Incorporation and Bylaws authorize them to transact the business by these resolutions defined, and no limitation has been otherwise imposed upon such authority.
RESOLVED, FURTHER, that the Brokers may rely upon any certification given in accordance with these resolutions, as effective until they receive written notice of a change in or the recession of authority.
RESOLVED, FURTHER, that, in the event of any change in the office or powers of persons hereby authorized, the Secretary shall certify such change to the Brokers in the manner hereinabove provided, which notification, when received, shall be adequate both to terminate the authorization of the persons theretofore authorized, and to authorize the persons thereby substituted.
IN WITNESS WHEREOF, I have subscribed my name this 1st day of July, 2006.
EXHIBIT B
U.S. BANK INSTITUTIONAL CUSTODY SERVICES
STANDARDS OF SERVICE GUIDE
U.S. Bank, N.A. ("USBank") is committed to providing superior quality service to all customers and their agents at all times. We have compiled this guide as a tool for our clients to determine our standards for the processing of security settlements, payment collection, and capital change transactions. Deadlines recited in this guide represent the times required for USBank to guarantee processing. Failure to meet these deadlines will result in settlement at our client's risk. In all cases, USBank will make every effort to complete all processing on a timely basis.
USBank is a direct participant of the Depository Trust Company, a direct member of the Federal Reserve Bank of Cleveland, and utilizes the Bank of New York as its agent for ineligible and foreign securities.
For corporate reorganizations, USBank utilizes SEI's Reorg Source, Financial Information, Inc., XCITEK, DTC Important Notices, Capital Changes Daily (CCH) and the Wall Street Journal.
For bond calls and mandatory puts, USBank utilizes SEI's Bond Source, Kenny Information Systems, Standard & Poor's Corporation, XCITEK, and DTC Important Notices. USBank will not notify clients of optional put opportunities.
Any securities delivered free to USBank or its agents must be received three (3) business days prior to any payment or settlement in order for the USBank standards of service to apply.
Should you have any questions regarding the information contained in this guide, please feel free to contact your account representative.
The information contained in this Standards of Service Guide is subject to change. Should any changes be made USBank will provide you with an updated copy of its Standards of Service Guide.
USBANK SECURITY SETTLEMENT STANDARDS
TRANSACTION TYPE INSTRUCTIONS DEADLINES* DELIVERY INSTRUCTIONS
---------------- ----------------------- ---------------------
DTC 1:30 P.M. on Settlement Date DTC Participant #2803
Agent Bank ID 27895
Institutional #________________
For Account #____________
Federal Reserve Book Entry 12:30 P.M. on Settlement Date Federal Reserve Bank of Cleveland
for Firstar Bank, N.A. ABA# 042000013
CINTI/1050
For Account #_____________
Federal Reserve Book Entry 1:00 P.M. on Settlement Date Federal Reserve Bank of Cleveland
(Repurchase Agreement for Firstar Bank, N.A. ABA# 042000013
Collateral Only) CINTI/1040
For Account #_____________
PTC Securities 12:00 P.M. on Settlement Date PTC For Account BYORK
(GNMA Book Entry) Firstar Bank / 117612
Physical Securities 9:30 A.M. EST on Settlement Bank of New York
Date (for Deliveries, by One Wall Street- 3rd Floor - Window A
4:00 P.M. on Settlement Date New York, NY 10286
minus 1) For account of Firstar Bank / Cust #117612
Attn: Donald Hoover
CEDEL/EURO-CLEAR 11:00 A.M. on Settlement Date Cedel a/c 55021
minus 2 FFC: a/c 387000
Firstar Bank /Global Omnibus
Euroclear a/c 97816
FFC: a/c 387000
Firstar Bank/Global Omnibus
Cash Wire Transfer 3:00 P.M. Firstar Bank, N.A. Cinti/Trust ABA# 042000013
Credit Account #112950027
Account of Firstar Trust Services
Further Credit to ___________
Account # _______________
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* All times listed are Eastern Standard Time.
USBANK PAYMENT STANDARDS
SECURITY TYPE INCOME PRINCIPAL ------------- ------ --------- Equities Payable Date Municipal Bonds* Payable Date Payable Date Corporate Bonds* Payable Date Payable Date Federal Reserve Bank Book Entry* Payable Date Payable Date PTC GNMA's (P&I) Payable Date + 1 Payable Date + 1 CMOs * DTC Payable Date + 1 Payable Date + 1 Bankers Trust Payable Date + 1 Payable Date + 1 SBA Loan Certificates When Received When Received Unit Investment Trust Certificates* Payable Date Payable Date Certificates of Deposit* Payable Date + 1 Payable Date + 1 Limited Partnerships When Received When Received Foreign Securities When Received When Received *Variable Rate Securities Federal Reserve Bank Book Entry Payable Date Payable Date DTC Payable Date + 1 Payable Date + 1 Bankers Trust Payable Date + 1 Payable Date + 1 |
NOTE: If a payable date falls on a weekend or bank holiday, payment will be made on the immediately following business day.
USBANK CORPORATE REORGANIZATION STANDARDS
DEADLINE FOR CLIENT INSTRUCTIONS TRANSACTION
TYPE OF ACTION NOTIFICATION TO CLIENT TO USBANK POSTING
-------------- ---------------------- -------------------------------- -----------
Rights, Warrants, Later of 10 business days prior to 5 business days prior to expiration Upon receipt
and Optional Mergers expiration or receipt of notice
Mandatory Puts with Later of 10 business days prior to 5 business days prior to expiration Upon receipt
Option to Retain expiration or receipt of notice
Class Actions 10 business days prior to expiration 5 business days prior to expiration Upon receipt
date
Voluntary Tenders, Later of 10 business days prior to 5 business days prior to expiration Upon receipt
Exchanges, expiration or receipt of notice
and Conversions
Mandatory Puts, Defaults, At posting of funds or securities None Upon receipt
Liquidations, Bankruptcies, received
Stock Splits, Mandatory
Exchanges
Full and Partial Calls Later of 10 business days prior to None Upon receipt
expiration or receipt of notice
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NOTE: Fractional shares/par amounts resulting from any of the above will be sold.
EXHIBIT C
SERIES NAMES
Separate Series of First American Investment Funds, Inc.
Name of Series Date Added -------------- ---------- Balanced Fund 7/1/2006 Equity Income Fund 7/1/2006 Equity Index Fund 7/1/2006 Large Cap Growth Opportunities Fund 7/1/2006 Large Cap Select Fund 7/1/2006 Large Cap Value Fund 7/1/2006 Mid Cap Growth Opportunities Fund 7/1/2006 Mid Cap Index Fund 7/1/2006 Mid Cap Value Fund 7/1/2006 Real Estate Securities Fund 7/1/2006 Small Cap Growth Opportunities Fund 7/1/2006 Small Cap Index Fund 7/1/2006 Small Cap Select Fund 7/1/2006 Small Cap Value Fund 7/1/2006 Small-Mid Cap Core Fund 7/1/2006 Core Bond Fund 7/1/2006 High Income Bond Fund 7/1/2006 Inflation Protected Securities Fund 7/1/2006 Intermediate Government Bond Fund 7/1/2006 Intermediate Term Bond Fund 7/1/2006 Short Term Bond Fund 7/1/2006 Total Return Bond Fund 7/1/2006 U.S. Government Mortgage Fund 7/1/2006 Arizona Tax Free Fund 7/1/2006 California Intermediate Tax Free Fund 7/1/2006 California Tax Free Fund 7/1/2006 Colorado Intermediate Tax Free Fund 7/1/2006 Colorado Tax Free Fund 7/1/2006 Intermediate Tax Free Fund 7/1/2006 Minnesota Intermediate Tax Free Fund 7/1/2006 Minnesota Tax Free Fund 7/1/2006 Missouri Tax Free Fund 7/1/2006 Nebraska Tax Free Fund 7/1/2006 Ohio Tax Free Fund 7/1/2006 Oregon Intermediate Tax Free Fund 7/1/2006 Short Tax Free Fund 7/1/2006 Tax Free Fund 7/1/2006 |
EXHIBIT D
FEE SCHEDULE
Each series of the First American Investment Funds, Inc., as now in existence or hereafter created from time to time, other than International Fund, shall pay to the Custodian a monthly fee at an annual rate of 0.005% of the average daily net assets of such series.
EXHIBIT E
SHAREHOLDER COMMUNICATIONS ACT AUTHORIZATION
FIRST AMERICAN INVESTMENT FUNDS, INC. (THE "FUND")
The Shareholder Communications Act of 1985 requires banks and trust companies to make an effort to permit direct communication between a company which issues securities and the shareholder who votes those securities.
Unless you specifically require us to NOT release your name and address to requesting companies, we are required by law to disclose your name and address.
Your "yes" or "no" to disclosure will apply to all securities U.S. Bank holds for you now and in the future, unless you change your mind and notify us in writing.
______ YES U.S. Bank is authorized to provide the Fund's name,
address and security position to requesting
companies whose stock is owned by the Fund.
______ NO U.S. Bank is NOT authorized to provide the Fund's
name, address and security position to requesting
companies whose stock is owned by the Fund.
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FIRST AMERICAN INVESTMENT FUNDS, INC.
Exhibit 99(h)(1)
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of July 1, 2006, by and between First American Investment Funds, Inc., a Maryland Corporation, (the "Fund"), and FAF Advisors, Inc., a Delaware corporation (the "Administrator").
WHEREAS, the Fund is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), consisting of several series of shares of Common Stock; and
WHEREAS, the Fund desires the Administrator to provide, and the Administrator is willing to provide, administrative and other services as set forth herein to all portfolios of the Fund now and hereafter created ("Portfolios"), on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, the Fund and the Administrator hereby agree as follows:
ARTICLE 1. Retention of the Administrator. The Fund hereby retains the Administrator to act as the administrator of the Portfolios and to furnish the Portfolios with the administrative services set forth in Article 2 below. The Administrator hereby accepts such employment to perform the duties set forth below.
The Administrator shall, for all purposes herein, be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Fund in any way and shall not be deemed an agent of the Fund.
ARTICLE 2. Administrative Services. For the compensation set forth in Schedule A hereto, the Administrator shall perform, or supervise the performance by others of, administrative and other services as set forth herein in connection with the operations of the Portfolios. The Administrator is authorized to appoint and compensate from its resources one or more other entities to perform such services on a subcontracted basis in connection with the operations of the Portfolios. If the Administrator appoints one or more other entities to perform services called for by this Agreement on a subcontracted basis as aforesaid, the Administrator nevertheless shall remain liable to the Fund and the Portfolios for the acts and omissions of such other entities as if the Administrator itself performed such services. The Administrator shall promptly notify the Fund of any persons appointed on a subcontracted basis pursuant to this provision.
In addition, on behalf of the Fund, the Administrator will monitor and review the Fund's relationships with vendors including relationships with custodians, depositories, transfer agents, accountants, the Fund's legal counsel, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and persons in any other capacity deemed to be necessary or desirable for the Portfolios' operations and, at the request of the Fund's Board of Directors, will investigate and assist in the selection of such service providers.
(A) Administrative and Accounting Services. The Administrator shall provide the Fund with regulatory reporting, fund accounting and related portfolio accounting services, all necessary office space, equipment, personnel, compensation and facilities (including facilities for Shareholders' and Directors' meetings) for handling the affairs of the Portfolios and such other services as the Administrator shall, from time to time, determine to be necessary to perform its obligations under this Agreement. In addition, at the request of the Fund's Board of Directors, the Administrator shall make such reports to the Fund's Directors concerning the performance of its obligations hereunder as reasonably agreed to from time to time. Without limiting the generality of the foregoing, the Administrator, under the supervision of the Fund's Board of Directors, shall:
- calculate Fund expenses and control all disbursements for the Fund, and as appropriate, compute the Fund's yields, total return, expense ratios, portfolio turnover rate and, if required, portfolio average dollar-weighted maturity;
- assist with preparation of prospectuses, statements of additional information, registration statements and proxy materials;
- prepare such reports, applications and documents (including reports regarding the sale and redemption of shares as may be required in order to comply with Federal and state securities law) as may be necessary or desirable to register the Fund's shares with state securities authorities, monitor sale of the Fund's shares for compliance with state securities laws, and file with the appropriate securities authorities the registration statements and reports for the Fund and the Fund's shares and all amendments thereto, as may be necessary or convenient to register and keep effective the Fund and its shares with state securities authorities to enable the Fund to make a continuous offering of its shares;
- prepare communications to shareholders, including the annual and semi-annual reports to shareholders, coordinate mailing prospectuses, notices, proxy statements, proxies and other reports to the Fund's shareholders, and supervise and facilitate the solicitation of proxies solicited by the Fund for all shareholder meetings, including the tabulation process for shareholder meetings;
- prepare, negotiate, and administer contracts on behalf of the Fund with, among others, the Fund's distributor, subject to any approvals or reapprovals by the Fund's Board of Directors required by applicable law or Board procedures;
- maintain the Fund's general ledger and prepare the Fund's financial statements, including expense accruals and payments, determine the net asset value of the Fund's assets and of the Fund's shares, and provide for the payment of dividends and other distributions to shareholders;
- calculate performance data of the Fund and the Portfolios for dissemination to information services covering the investment company industry;
- coordinate and supervise the preparation and filing of the Fund's tax returns;
- examine and review the operations and performance of the various organizations providing services to the Fund or any Portfolio directly or on a subcontracted basis as provided for herein and, at the request of the Fund's Board of Directors, report to the Board on the performance of such organizations;
- provide for and coordinate the layout and printing of publicly disseminated prospectuses and the Fund's semi-annual and annual reports to shareholders;
- provide internal legal and administrative services as requested by the Fund from time to time;
- provide for and coordinate the design, development, and operation of the Fund, including new portfolio and class investment objectives, policies and structure;
- provide individuals reasonably acceptable to the Fund's Board of Directors for nomination, appointment, or election as officers of the Fund, who will be responsible for the management of certain of the Fund's affairs as determined by the Fund's Board of Directors;
- advise the Fund and the Fund's Board of Directors on matters concerning the Fund and its affairs;
- obtain and keep in effect fidelity bonds and directors and officers/errors and omissions insurance policies for the Fund in accordance with the requirements of Rules 17g-1 and 17d-1(7) under the 1940 Act as such bonds and policies are approved by the Fund's Board of Directors;
- monitor and advise the Fund and the Portfolios on their registered investment company status under the Internal Revenue Code of 1986, as amended;
- perform all administrative services and functions required for the operation of the Fund and each Portfolio to the extent such administrative services and functions are not provided to the Fund or such Portfolio pursuant to the Fund's or such Portfolio's investment advisory agreement, distribution agreement, custodian agreement and transfer agency agreement;
- furnish advice and recommendations with respect to other aspects of the business and affairs of the Portfolios as the Fund and the Administrator shall determine desirable;
- prepare and file with the Securities and Exchange Commission the semi-annual reports for the Fund on Form N-SAR and Form N-CSR, quarterly reports on Form N-Q, annual proxy voting reports on Form N-PX and all required notices pursuant to Rule 24f-2; and
- organize and coordinate meetings of the Fund's Board of Directors and the committees thereof.
(B) Other Services. The Administrator shall establish a call center to answer shareholder inquiries and provide information and data to prospective shareholders or marketing materials to selling brokers and potential selling brokers. In addition, to the extent it deems appropriate, the Administrator shall contract with broker-dealers, financial institutions and other entities for the provision of recordkeeping and other customary services related to omnibus accounts established by such entities, or for the provision of shareholder services or other appropriate services, and shall pay such entities out of its own assets for the provision of such services. The Administrator will also perform such other services for the Fund as agreed from time to time at the request of the Fund's Board of Directors, including, but not limited to, performing internal audit examinations; mailing annual reports of the Portfolios; preparing a list of shareholders; and mailing notices of shareholders' meetings, proxies and proxy statements, for all of which the Fund will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. Allocation of Charges and Expenses.
(A) The Administrator. The Administrator shall furnish at its own expense the executive, supervisory and clerical personnel necessary to perform its obligations under this Agreement. The Administrator shall also provide the items which it is obligated to provide under this Agreement, and shall pay all compensation, if any, of officers of the Fund as well as all Directors of the Fund who are officers or employees of the Administrator or any affiliated corporation of the Administrator; provided, however, that unless otherwise specifically provided, the Administrator shall not be obligated to pay the compensation of any employee of the Fund retained by the Directors of the Fund to perform services on behalf of the Fund.
(B) The Fund. The Fund assumes and shall pay or cause to be paid all other expenses of the Fund not otherwise allocated herein, including, without limitation, organizational costs, taxes, expenses for outside Fund counsel (including, if applicable, counsel to the Fund's independent directors) and independent auditing services, the expenses of preparing (including typesetting), printing and mailing reports, prospectuses, statements of additional information, proxy solicitation material and notices to existing shareholders, all expenses incurred in connection with issuing and redeeming shares, the costs of custodial services, the cost of initial and ongoing registration of the shares under Federal and state securities laws, fees and out-of-pocket expenses of Directors who are not affiliated officers or employees of the Administrator or any affiliated corporation of the Administrator, insurance, interest, brokerage costs, dues and other expenses incident to the Fund's membership in the Investment Company Institute and other like associations, shareholder meetings, corporate reports and reports and notices to shareholders, litigation and other extraordinary or nonrecurring expenses, all fees and charges of investment advisers to the Fund, Rule 12b-1 fees and reasonable reimbursement for out-of-pocket expenses including, without limitation, postage and telephone communications expense. The Administrator shall provide such information to the Board at such times as the Board may reasonably request to enable the Board to monitor such Fund expenses.
ARTICLE 4. Compensation of the Administrator.
(A) Administration Fee. For the services to be rendered, the facilities furnished and the expenses assumed by the Administrator pursuant to this Agreement, the Fund (for and on behalf of each Portfolio or class of shares thereof, as applicable) shall pay to the Administrator compensation at an annual rate, which is calculated and accrued daily and paid to the Administrator monthly, as specified in Schedule A.
If this Agreement becomes effective subsequent to the first day of a month or terminates before the last day of a month, the Administrator's compensation for that part of the month in which this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees as set forth above. Payment of the Administrator's compensation for the preceding month shall be made promptly.
In addition to the fee paid pursuant to this Article 4, the Fund will reimburse the Administrator for out-of-pocket expenses or advances incurred by the Administrator in connection with the Administrator's performance of services hereunder, as set forth in Schedule A to this Agreement.
(B) Survival of Compensation Rates. All rights to compensation under this Agreement for services performed as of the termination date shall survive the termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator. The duties of the Administrator shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against the Administrator hereunder. The Administrator shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in carrying out its duties hereunder, except a loss resulting from willful misfeasance, bad faith or negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder, except as may otherwise be provided under provisions of applicable law which cannot be waived or modified hereby. (As used in this Article 5, the term "Administrator" shall include directors, officers, employees and other corporate agents of the Administrator as well as that corporation itself.)
So long as the Administrator acts in good faith and with due diligence and without negligence, the Fund assumes full responsibility and shall indemnify the Administrator and hold it harmless from and against any and all actions, suits and claims, whether groundless or otherwise, and from and against any and all losses, damages, costs, charges, reasonable counsel fees and disbursements, payments, expenses and liabilities (including reasonable investigation expenses) arising directly or indirectly out of said administration, transfer agency, and dividend disbursing relationships to the Fund or any other service rendered to the Fund hereunder. The indemnity and defense provisions set forth herein shall indefinitely survive the termination of this Agreement.
The Administrator shall indemnify and hold harmless the Fund and each Portfolio from and against any and all losses, damages, costs, charges, reasonable counsel fees and disbursements, payments, expenses and liabilities arising out of or attributable to any action or failure or omission to act by the Administrator as a result of the Administrator's willful misfeasance, bad faith or negligence.
In order that the indemnification provision contained herein shall apply, however, it is understood that if in any case the Fund may be asked to indemnify or hold the Administrator harmless, the Fund shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Administrator will use all reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Fund, but failure to do so in good faith shall not affect the Administrator's rights hereunder.
The Fund shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If the Fund elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by the Fund and reasonably satisfactory to the Administrator, whose approval shall not be unreasonably withheld. In the event that the Fund elects to assume the defense of any suit and retain counsel, the Administrator shall bear the fees and expenses of any additional counsel retained by it. If the Fund does not elect to assume the defense of a suit, it will reimburse, subject and pursuant to the provisions of this Article 5, the Administrator for the reasonable fees and expenses of any counsel retained by the Administrator.
The Administrator may apply to the Fund at any time for instructions and may consult outside counsel for the Fund or its own counsel and with accountants and other experts with respect to any matter arising in connection with the Administrator's duties, and the Administrator shall not be liable or accountable for any action taken or omitted by it in good faith in accordance with such instruction or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document which it reasonably believes to be genuine and to have been signed or presented by the proper person or persons, other than documents signed or presented by officers, directors, employees and other corporate agents of the Administrator.
ARTICLE 6. Activities of the Administrator. The services of the Administrator rendered to the Fund are not to be deemed to be exclusive. The Administrator is free to render such services to others and to have other businesses and interests.
ARTICLE 7. Duration of this Agreement. The term of this Agreement, unless sooner terminated as specified below, shall commence on July 1, 2005 and shall remain in effect through June 30, 2006. This Agreement shall continue in effect from year to year thereafter, but only so long as such continuance is specifically approved at least annually by the Fund's Board of Directors, including the specific approval of a majority of the directors who are not interested persons of the Fund.
The Administration Agreement will be terminable by the Fund with respect to any Portfolio by delivery to the Administrator of written notice: (i) for any reason on six months' prior written notice to the Administrator; (ii) in the event of the Administrator's bankruptcy or insolvency; (iii) in the event of a conviction of the Administrator for corporate criminal activity; (iv) if the Administrator has materially breached the Agreement, and such material breach has not been cured within 45 days after written notice is received by the Administrator specifying the nature of the material breach. The Agreement will be terminable by the Administrator by delivery to the Portfolios of written notice of termination delivered no less than 180 days prior to the end of the Initial Term (as extended if applicable).
This Agreement shall not be assignable by the Fund or by the Administrator without the written consent of the other party.
ARTICLE 8. Amendments. This Agreement may be amended by the parties hereto only if such amendment is specifically approved (i) by the vote of a majority of the Directors of the Fund, and (ii) by the vote of a majority of the Directors of the Fund who are not parties to this Agreement or interested persons of any such party.
ARTICLE 9. Certain Records. The Administrator shall maintain customary records in connection with its duties as specified in this Agreement. Any records required to be maintained and preserved pursuant to Rules 31a-1 and 31a-2 under the 1940 Act which are prepared or maintained by the Administrator on behalf of the Fund shall be prepared and maintained at the expense of the Administrator, but shall be the property of the Fund and will be made available to or surrendered promptly to the Fund on request.
In case of any request or demand for the inspection of such records by another party, the Administrator shall notify the Fund and follow the Fund's instructions as to permitting or refusing such inspection; provided that the Administrator may exhibit such records to any person in any case where it is advised by its counsel that it may be held liable for failure to do so, unless (in cases involving potential exposure only to civil liability) the Fund has agreed to indemnify the Administrator against such liability.
ARTICLE 10. Definitions of Certain Terms. The terms "interested person" and "affiliated person", when used in this Agreement, shall have the respective meanings specified in the 1940 Act and the rules and regulations thereunder, subject to such exemptions as may be granted by the Securities and Exchange Commission.
ARTICLE 11. Notice. Any notice required or permitted to be given by one
party to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other party
(a) in the case of notice to the Fund, to the Chair of the Board of Directors of
the Fund at the last address furnished by such person or, if the Chair is an
affiliated person or interested person of the Administrator, to the Directors of
the Fund who are not such affiliated persons or interested persons at the last
addresses furnished by such persons, and (b) in the case of notice to the
Administrator, to the last address furnished by the Administrator for such
purpose.
ARTICLE 12. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Minnesota and the applicable provisions of the 1940 Act. To the extent that the applicable laws of the State of Minnesota, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control.
ARTICLE 13. Multiple Originals. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By /s/ Jeffery M. Wilson ------------------------------------- Jeffery M. Wilson |
Its Vice President - Administration
FAF ADVISORS, INC.
By /s/ Joseph M. Ulrey, III ------------------------------------- Joseph M. Ulrey, III |
Its Chief Financial Officer
Exhibit 99(h)(2)
SCHEDULE A TO THE ADMINISTRATION AGREEMENT DATED AS OF JULY 1, 2006,
BETWEEN FIRST AMERICAN INVESTMENT FUNDS, INC. (THE "FUND") AND
FAF ADVISORS, INC. (THE "ADMINISTRATOR")
ADMINISTRATION FEES
Pursuant to Article 2, the Fund shall pay the Administrator compensation for services rendered to each Portfolio, calculated daily and paid monthly, at the annual rates set forth in the following table. Such rates are based on the net assets of all open-end mutual funds for which the Administrator acts as investment adviser and provides administrative services ("Complex-Wide Assets"):
COMPLEX-WIDE ASSETS FEE (IN BILLIONS) (PER ANNUM) ----------------------- ----------- First $8 billion 25.0 bp Next $17 billion 23.5 bp Next $25 billion 22.0 bp Assets over $50 billion 20.0 bp |
Complex-Wide Assets at the end of each day are applied to the above fee schedule to determine the hypothetical fee that would be charged if such schedule were applicable to all open-end mutual funds for which the Administrator acts as investment adviser and provides administrative services (the "Complex-Wide Fee"). Each Portfolio is then charged an administrative fee (accrued daily and calculated and paid monthly) equal to its proportionate amount of the Complex-Wide Fee, determined based on the Portfolio's proportionate amount of Complex-Wide Assets.
OUT-OF-POCKET EXPENSES
In addition to paying the Administrator the fees described above, the Fund agrees to reimburse the Administrator for its out-of-pocket expenses in providing services hereunder, including without limitation the following:
(a) All postage and delivery charges incurred by the Administrator in delivering materials to and from the Fund;
(b) All telephone, telecopy or other electronic transmission and communication expenses incurred by the Administrator in communication with the Fund, the Fund's custodian or others as required for the Administrator to perform the services to be provided hereunder;
(c) The Fund's pro rata share of the cost of the Administrator obtaining pricing service quotations;
(d) The cost of any media used to create and store records or other materials;
(e) All systems-related expenses associated with the provision of special reports and services;
(f) Any expenses the Administrator shall incur at the written direction of an officer of the Fund thereunto duly authorized; and
(g) Any additional expenses, agreed to in advance by the Fund, reasonably incurred by the Administrator in the performance of its duties and obligations under this Agreement.
Exhibit 99(h)(4)
TRANSFER AGENT AND SHAREHOLDER SERVICING
AGREEMENT
THIS AGREEMENT is made and entered into as of July 1, 2005, by and among First American Investment Funds, Inc., a Maryland corporation (the "Fund"), and U.S. Bancorp Fund Services, LLC, a Wisconsin limited liability company ("USBFS").WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company consisting of several series of shares of Common Stock;
WHEREAS, USBFS is, among other things, in the business of administering transfer and dividend disbursing agent functions for the benefit of its customers; and
WHEREAS, the Fund desires to retain USBFS to provide transfer and dividend disbursing agent services to all portfolios of the Fund now and hereafter created ("Portfolios"), on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:
1. APPOINTMENT OF USBFS AS TRANSFER AGENT
The Fund hereby appoints USBFS as transfer agent of the Fund on the terms and conditions set forth in this Agreement, and USBFS hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement. The Fund hereby also authorizes USBFS to contract with qualifying financial institutions for the establishment and maintenance of omnibus accounts and for the provision of customary services related to such omnibus accounts.
2. SERVICES AND DUTIES OF USBFS
A. USBFS shall perform all of the customary services of a transfer agent and dividend disbursing agent for the Fund, and as relevant, agent in connection with accumulation, open account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to:
1) Receive and process all orders for the purchase, exchange, and/or redemption of shares in accordance with Rule 22c-1 of the 1940 Act, including the calculation and collection of any applicable sales charges.
2) Process purchase orders with prompt delivery, where appropriate, of payment and supporting documentation to the Fund's custodian, and issue the appropriate number of uncertificated shares with such uncertificated shares being held in the appropriate shareholder account.
3) Arrange for issuance of shares obtained through transfers of funds from Fund shareholders' accounts at financial institutions and arrange for the exchange of shares for shares of other eligible investment companies, when permitted by the Fund's current prospectuses ("Prospectuses").
4) Process redemption requests received in good order and, where relevant, deliver appropriate documentation to the Fund's custodian.
5) Pay monies upon receipt from the Fund's custodian, where relevant, in accordance with the instructions of redeeming shareholders.
6) Process transfers of shares in accordance with the shareholder's instructions.
7) Process exchanges between Portfolios and/or classes of shares of Portfolios and between a Portfolio and any other investment company or series thereof for which FAF Advisors, Inc. ("FAF Advisors") acts as investment adviser.
8) Prepare and transmit payments for dividends and distributions declared by the Fund, after deducting any amount required to be withheld by any applicable laws, rules and regulations and in accordance with shareholder instructions.
9) Serve as agent of the Fund in connection with accumulation, open account or similar plans (e.g., periodic investment plans and periodic withdrawal plans.
10) Make changes to shareholder records, including, but not limited to, address changes in plans (e.g., systematic withdrawal, automatic investment, dividend reinvestment).
11) Handle load and multi-class processing, including rights of accumulation and purchases by letters of intent.
12) Record the issuance of shares of the Fund and maintain, pursuant to Rule 17Ad-10(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a record of the total number of shares of the Fund which are authorized, issued and outstanding.
13) Prepare shareholder meeting lists and, if applicable, mail, receive and tabulate proxies.
14) Mail shareholder reports and Prospectuses to current shareholders.
15) Prepare and file U.S. Treasury Department Forms 1099 and other appropriate information returns required with respect to dividends and distributions for shareholders.
16) Provide shareholder account information upon request and prepare and mail confirmations and statements of account to shareholders for purchases, redemptions and other confirmable transactions as agreed upon with the Fund.
17) Mail requests for shareholders' certifications under penalties of perjury and pay on a timely basis to the appropriate federal authorities any taxes to be withheld on dividends and distributions paid by the Fund, all as required by applicable federal tax laws and regulations.
18) Provide a Blue Sky system that will enable the Fund to monitor the total number of shares of the Fund sold in each state. In addition, the Fund or its agent shall identify to USBFS in writing those classes of shares or transactions to be treated as exempt from the Blue Sky reporting for each state.
19) Answer correspondence from shareholders, securities brokers and others relating to USBFS's duties hereunder and such other correspondence as may from time to time be mutually agreed upon between USBFS and the Fund.
20) Reimburse the Fund each month for all material losses resulting from "as of" processing errors for which USBFS is responsible in accordance with the "as of" processing guidelines agreed to by USBFS and FAF Advisors.
3. REPRESENTATIONS OF USBFS
USBFS represents and warrants to the Fund, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
A. It is a limited liability corporation duly organized, existing and in good standing under the laws of Wisconsin;
B. It is a registered transfer agent under the Exchange Act.
C. It is duly qualified to carry on its business in the State of Wisconsin;
D. It is empowered under applicable laws and by its charter and bylaws to enter into and perform this Agreement;
E. All requisite corporate proceedings have been taken to authorize it to enter and perform this Agreement;
F. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement; and
G. It is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement.
H. This Agreement has been duly authorized, executed and delivered by USBFS in accordance with all requisite action and constitutes a valid and legally binding obligation of USBFS, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties.
4. REPRESENTATIONS OF THE FUND
The Fund represents and warrants to USBFS, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
A. The Fund is an open-end investment company under the 1940 Act;
B. The Fund is a corporation organized, existing, and in good standing under the laws of the State of Maryland;
C. The Fund is empowered under applicable laws and by its Articles of Incorporation and Bylaws to enter into and perform this Agreement;
D. The Fund will comply with all applicable requirements of the Securities Act of 1933, as amended, the Exchange Act, the 1940 Act, and any laws, rules and regulations of governmental authorities having jurisdiction;
E. The Fund is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement;
F. A registration statement under the 1940 Act and the Securities Act of 1933, as amended, is made effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all shares of the Fund being offered for sale; and
G. This Agreement has been duly authorized, executed and delivered by the Fund in accordance with all requisite action and constitutes a valid and legally binding obligation of the Fund, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties.
5. SERVICE STANDARDS
On a monthly basis, USBFS shall submit a written report to FAF Advisors concerning the performance of its obligations under this Agreement, including the accuracy and timeliness of the various services provided pursuant to this Agreement (the "Service Standards Report"). The Service Standards Report shall include such measures as are agreed to by the parties from time to time. In addition, USBFS agrees to make such reports and presentations to the Board of Directors as may be reasonably requested from time to time.
6. COMPENSATION
USBFS shall be compensated for providing the services set forth in this Agreement and for such out-of-pocket expenses as are reasonably incurred by USBFS in performing its duties hereunder in accordance with the fee schedule set forth on Exhibit A hereto (as amended from time to time).
The Fund shall pay all fees and reimbursable expenses within thirty (30) calendar days following receipt of the billing notice, except for any fee or expense subject to a good faith dispute. The Fund shall notify USBFS in writing within thirty (30) calendar days following receipt of each invoice if the Fund is disputing any amounts in good faith. The Fund shall settle such disputed amounts within ten (10) calendar days of the day on which the parties agree to the amount to be paid. Notwithstanding anything to the contrary, amounts owed by the Fund to USBFS shall only be paid out of assets and property of the Fund.
7. STANDARD OF CARE; INDEMNIFICATION; LIMITATION OF LIABILITY
The duties of the USBFS shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against USBFS hereunder. USBFS shall not be liable for any error of judgment or mistake of law or for any loss arising out of any act or omission in carrying out its duties hereunder, except a loss resulting from willful misfeasance, bad faith or negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder, except as may otherwise be provided under provisions of applicable law which cannot be waived or modified hereby. (As used in this Section 7, the term "USBFS" shall include directors, officers, employees and other corporate agents of USBFS as well as that corporation itself.)
So long as USBFS acts in good faith and with due diligence and without negligence, the Fund assumes full responsibility and shall indemnify USBFS and hold it harmless from and against any and all actions, suits and claims, whether groundless or otherwise, and from and against any and all losses, damages, costs, charges, reasonable counsel fees and disbursements, payments, expenses and liabilities (including reasonable investigation expenses) arising directly or indirectly out of USBFS' relationship with the Fund, including USBFS' actions taken or nonactions with respect to the performance of services hereunder. The indemnity and defense provisions set forth herein shall survive the termination of this Agreement.
The rights hereunder shall include the right to reasonable advances of defense expenses in the event of any pending or threatened litigation with respect to which indemnification hereunder may ultimately be merited; provided, however, that in the event that it is ultimately determined that indemnification is not warranted, any such amounts advanced hereunder shall be repaid. In order that the indemnification provision contained herein shall apply, however, it is understood that if in any case the Fund may be asked to indemnify or hold USBFS harmless, the Fund shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that USBFS will use all reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Fund.
The Fund shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If the Fund elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by the Fund and satisfactory to USBFS, whose approval shall not be unreasonably withheld. In the event that the Fund elects to assume the defense of any suit and retain counsel, USBFS shall bear the fees and expenses of any additional counsel retained by it. If the Fund does not elect to assume the defense of a suit, it will reimburse USBFS for the reasonable fees and expenses of any counsel retained by USBFS.
USBFS may apply to the Fund at any time for instructions and may consult outside counsel for the Fund or its own counsel and with accountants and other experts with respect to any matter arising in connection with USBFS' duties, and, except for such actions or omissions constituting negligence, USBFS shall not be liable or accountable for any action taken or omitted by it in good faith and in accordance with such instruction or with the opinion of such counsel, accountants or other experts.
8. PROPRIETARY AND CONFIDENTIAL INFORMATION
USBFS agrees on behalf of itself and its directors, officers, and employees to treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund and prior, present, or potential shareholders (and clients of said shareholders) and not to use such records and information for any purpose other than the performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where USBFS may be exposed to civil or criminal contempt proceedings for failure to comply after being requested to divulge such information by duly constituted authorities, or when so requested by the Fund.
Further, USBFS will adhere to the privacy policies adopted by the Fund pursuant to Title V of the Gramm-Leach-Bliley Act, as may be modified from time to time (the "Act"). Notwithstanding the foregoing, USBFS will not share any nonpublic personal information concerning any of the Fund's shareholders with any third party unless specifically directed by the Fund or allowed under one of the exceptions noted under the Act. USBFS shall have in place and maintain physical, electronic, and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of, records and information relating to the Fund or its shareholders.
9. ANTI-MONEY LAUNDERING PROGRAM
USBFS, as named transfer agent for the Fund, has established and implemented an anti-money laundering program reasonably designed to prevent the Fund from being used to launder money.
A. Policies and Procedures. USBFS has implemented policies, procedures, and internal controls that achieve compliance with the applicable provisions of the Bank Secrecy Act ("BSA") and are reasonably designed to detect activities indicative of money laundering, including but not limited to detection of the following transactions:
1) An investment in a fund by check or checks drawn on the account of a third party or parties unrelated to the investor;
2) An investment in a fund by one or more wire transfers from an account of a third party or parties unrelated to the investor;
3) Frequent wire transfer activity to and from a cash reserve account, coming from or sent to the same bank;
4) Payments that indicate structuring occurring at another financial institution, such as large amounts of sequentially numbered money orders or travelers checks or cashiers checks in amounts under the $10,000 currency reporting threshold;
5) Large deposits with relatively small fund investments;
6) Frequent purchases of Fund shares followed by large redemptions; and
7) Transfers to accounts in countries where drugs are known to be produced or other high-risk countries.
USBFS will file all reports that are required by law or regulation in order to report certain types of transactions. USBFS will also analyze the money laundering risks posed by particular omnibus accounts based on a risk-based evaluation of relevant factors. In addition, USBFS will follow its procedures to prohibit transactions with individuals, entities or jurisdictions identified on any list of known or suspected terrorists or on the Treasury's Office of Foreign Assets Control ("OFAC") List.
USBFS agrees that federal examiners will have access to information and records relating to its anti-money laundering program and consents to any inspection authorized by law or regulation in connection thereof.
USBFS will amend its anti-money laundering program as necessary to reflect future implementing regulations applicable to the Fund.
B. Customer Identification Program ("CIP"). USBFS has implemented risk-based procedures designed to ensure that the Fund verifies the identity of new customers to the extent reasonable and practicable, including but not limited to:
1) Procedures for opening an account that specify the identifying information that will be obtained with respect to each customer prior to opening an account;
2) Procedures for verifying the identity of the customer within a reasonable time after the account is opened;
3) Procedures for making and maintaining certain records relating to the identification and verification of customers;
4) Procedures for determining whether the customer appears on certain lists of known or suspected terrorists or terrorist organizations; and
5) Procedures for providing mutual fund customers with adequate notice that the mutual fund is requesting information to verify their identities.
USBFS will certify annually to the Fund that it has implemented an anti-money laundering program and will perform the specified requirements of the Fund's CIP.
C. Training. USBFS will provide ongoing training to employees that is relevant to their functions, including but not limited to BSA requirements. The level, frequency, and focus of the training will be determined according to the responsibilities of the employees. Training will be provided whenever employees, including new employees, assume duties that bring them in contact with BSA requirements or potential money laundering activities. The ongoing training program will include periodic updates and refresher courses regarding the anti-money laundering program.
D. Quarterly Reports. USBFS will report to the Fund Board of Directors, at least quarterly, any anti-money laundering compliance exceptions, including the resolution of such exceptions. Summary reports will include but not be limited to "OFAC hits" and any Suspicious Activity Report filings.
E. Inspection. USBFS agrees that federal, state and other self-regulatory organization examiners will have access to information and records relating to any anti-money laundering activities performed by USBFS for the Fund, and USBFS consents to any inspection authorized by law or regulation in connection thereof.
F. Annual Audit. USBFS agrees to an annual independent audit of its anti-money laundering program. Any recommendation resulting from such review will be promptly implemented or submitted to the Fund's Board of Directors for consideration.
10. TERM OF AGREEMENT; AMENDMENT
This Agreement shall become effective as of the date first written above and will continue in effect for a period of one year. This Agreement shall continue in effect from year to year thereafter, but only so long as such continuance is specifically approved at least annually by the Fund's Board of Directors, including the specific approval of a majority of the directors who are not interested persons of the Fund. Subsequent to the initial one-year term, this
Agreement may be terminated by the Fund or USBFS upon giving ninety (90) days' prior written notice to the other party or such shorter period as is mutually agreed upon by the parties. Nothwithstanding the foregoing, this Agreement may be terminated by any party upon a material breach of this Agreement by the other party if such breach is not cured within 15 days of notice of such material breach to the breaching party. This Agreement may not be amended or modified in any manner except by written agreement executed by USBFS and the Fund, and authorized or approved by the Board of Directors.
11. DUTIES IN THE EVENT OF TERMINATION
In the event that, in connection with termination, a successor to any of USBFS's duties or responsibilities hereunder is designated by the Fund by written notice to USBFS, USBFS will promptly, upon such termination and at the expense of the Fund, transfer to such successor all relevant books, records, correspondence, and other data established or maintained by USBFS under this Agreement in a form reasonably acceptable to the Fund (if such form differs from the form in which USBFS has maintained, the Fund shall pay any expenses associated with transferring the data to such form), and will cooperate in the transfer of such duties and responsibilities, including provision for assistance from USBFS's personnel in the establishment of books, records, and other data by such successor. If no successor is designated, such books, records, and other data will be returned to the Fund.
12. RECORDS
USBFS shall keep records relating to the services to be performed hereunder in the form and manner, and for such period, as it may deem advisable and is agreeable to the Fund, but not inconsistent with the rules and regulations of appropriate government authorities, in particular, Section 31 of the 1940 Act and the rules thereunder. USBFS agrees that all such records prepared or maintained by USBFS relating to the services to be performed by USBFS hereunder are the property of the Fund and will be preserved, maintained, and made available in accordance with such applicable sections and rules of the 1940 Act and will be promptly surrendered to the Fund on and in accordance with its request. Further, federal examiners shall have access to information and records relating to anti-money laundering activities performed by USBFS hereunder and USBFS consents to any inspection authorized by law or regulation in connection thereof.
13. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State of Minnesota, without regard to conflicts of law principles. To the extent that the applicable laws of the State of Minnesota, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control, and nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or order of the Securities and Exchange Commission thereunder.
14. DATA NECESSARY TO PERFORM SERVICES
The Fund or its agent shall furnish to USBFS the data necessary to perform the services described herein at such times and in such form as mutually agreed upon.
15. ASSIGNMENT
This Agreement may not be assigned by the Fund without the written consent of USBFS, or by USBFS without the written consent of the Fund accompanied by the authorization or approval of the Board of Directors.
16. SERVICES NOT EXCLUSIVE
Nothing in this Agreement shall limit or restrict USBFS from providing services to other parties that are similar or identical to some or all of the services provided hereunder.
17. INVALIDITY
Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties.
18. NOTICES
Any notice required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been given on the date delivered personally or by courier service, or three (3) days after sent by registered or certified mail, postage prepaid, return receipt requested, or on the date sent and confirmed received by facsimile transmission to the other party's address set forth below: Notice to USBFS shall be sent to:
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Fund shall be sent to:
Chuck Gariboldi, Fund Treasurer
First American Funds, US Bancorp Center
800 Nicollet Mall
BC-MN-H05O
Minneapolis, MN 55402
19. MULTIPLE ORIGINALS
This Agreement may be executed on two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer on one or more counterparts as of the date first above written.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By /s/ Jeffery M. Wilson ---------------------------------------- Jeffery M. Wilson |
Its Vice President - Administration
U.S. BANCORP FUND SERVICES, LLC.
By /s/ Joe D. Redwine ---------------------------------------- Joe D. Redwine |
Its President
EXHIBIT A
TRANSFER AGENT & SHAREHOLDER SERVICES
ANNUAL FEE SCHEDULE
SERVICE CHARGES TO THE FUND
Shareholder Account Fee (Subject to Minimum)
- No-Load - $15.00 /account
- Load Fund - $16.00 /account
- Daily Accrual Fund - $21.00 /account
- Closed Accounts - $2.50 /account
Annual Minimum
- $30,000 per no-load fund
- $36,000 per load or daily accrual fund
- $18,000 each additional class
ACTIVITY CHARGES
- Telephone Calls - $1.00 /minute
- Voice Response Call - $.35/call
- E-mail Services $200 /month administration $3.00 /e-mail received
- Draft Check Processing - $3.00 /draft
- Daily Valuation Trades - $10.00 /trade
- Lost Shareholder Search - $5.00 /search
- AML New Account Service - $1.00/new domestic accounts and $2.00/new foreign account
- ACH/EFT Shareholder Services:
$125.00 /month/fund group
$ .50 /ACH item, setup, change $5.00 /correction, reversal
OUT-OF-POCKET COSTS
- Telephone toll-free lines, call transfers, etc.
- Mailing, sorting and postage
- Stationery, envelopes
- Programming, special reports
- Insurance, record retention, microfilm/fiche
- Proxies, proxy services
- ACH fees
- NSCC charges
- Cusip Base Fee
- Any additional expenses reasonably incurred by USBFS in the performance of its duties and obligations under the Transfer Agent and Shareholder Servicing Agreement, if agreed to in advance by the Fund
SERVICE CHARGES TO INVESTORS
Qualified Plan Fees (Billed to Investors)
- $25.00 /transfer to successor trustee
- $25.00 /participant distribution (Excluding SWPs)
- $25.00 /refund of excess contribution
Additional Shareholder Fees (Billed to Investors)
- $15.00 /outgoing wire transfer
- $15.00 /overnight delivery
- $ 5.00 /telephone exchange
- $25.00 /return check or ACH
- $25.00 /stop payment
- $ 5.00 /research request per account (Cap at $25.00/request) (For requested items of the second calendar year [or previous] to the request)
TECHNOLOGY CHARGES
1. Fund Group Setup (first cusip) - $2,000 /fund group
2. Fund Setup - $750 /cusip (beyond first cusip)
3. NSCC Service Interface - All NSCC Services
- Annual - $1,400 /cusip/year
4. Telecommunications and Voice Services
- Service Setup - $1,650 ATT transfer connect
- VRU Setup - $500 /fund group
- VRU Maintenance - $100 /cusip/month
- $.35 /voice response call
- $.40 /voice recognition call
5. Asset Allocation Services - $8.00 /account group/year (4 reallocations)
6. 12b-1 Aging - $1.50 /account/year
7. Average Cost - $.36 /account/year
8. Development/Programming - $150 /hour
9. File Transmissions - subject to requirements
10. Selects - $300 per select
11. Extraordinary services - charged as incurred
- Conversion of Records (if necessary) - Estimate to be provided.
- Custom processing, re-processing
All other extraordinary services
Fees are billed monthly.
INTERNET SERVICES
ANNUAL FEE SCHEDULE
FAN WEB - Shareholder internet access to account information and transaction capabilities. Internet service is connected directly to the fund group's web site through a transparent hyperlink. Shareholders can access account information, portfolio listing within a fund family, view transaction history, purchase additional shares through ACH, etc.
Implementation - $15,000 per management company - includes up to 10 hours of assistance from BSAs and technical staff (additional assistance - $150/hour)
Annual Base Fee - $36,000 per year
Activity (Session) Fees:
- Inquiry - $.15 per event
- Account Maintenance - $.25 per event
- Transaction - financial transactions, reorder statements, etc. - $.50 per event
- New Account Set-up - $3.00 per event
VISION MUTUAL FUND GATEWAY - Permits broker/dealers, financial planners, and RIAs to us a web-based system to perform order and account inquiry, execute trades, print applications, review prospectuses, and establish new accounts.
Inquiry Only
- Inquiry - $.05 per event
- Per broker ID - $5.00 per month per ID
Transaction Processing
- Implementation - $5,000 per management company
- Transaction - purchase, redeem, exchange, literature order - $.50 per event
- New Account Set-up - may contain multiple fund/accounts - $3.00 per event
- Monthly Minimum Charge - $500.00 per month
FAN MAIL - Financial planner mailbox provides transaction, account and price information to financial planners and small broker/dealers for import into a variety of financial planning software packages.
Base Fee Per Management Company - file generation and delivery - $6,000 per year
Per Record Charge
- Rep/Branch/ID - $.018
- Dealer - $.012
- Price Files - $.002 or $1.75/user/month, whichever is less
MUTUAL FUND EXCHANGE (MFX) SERVICE SUITE
ANNUAL FEE SCHEDULE
MFX WEB SERVICES
A. MFS ON-LINE SYSTEMS ACCESS
On-line internet access to U.S. Bancorp systems
Setup - $1,500 initial setup per concurrent connection
(up to 5 workstations each)
Service - $125/month per concurrent connection - internet access;
$125/month per concurrent connection - 3270 access
FundSource Access - Quoted separately
Number of concurrent connections required 0
---
Total Monthly Fee (@ $125) $ 0
===
B. IMAGE AND/OR COLD ON-LINE ACCESS
On-line internet access to U.S. Bancorp shareholder document images,
statements and tax advices (COLD)
Setup - $1,500 initial setup per concurrent connection
(up to 5 workstations each)
Service - $325/month/concurrent connection
Number of concurrent connections required 0
---
Total Monthly Fee (@ $325) $ 0
===
C. REPORTSOURCE
On-line internet access to standard reports and files from various
U.S. Bancorp data sources
No initial setup charge
$125/month for each of the following data sources
(Check required reports) 0
---
Fund Accounting Reports 0
---
Transfer Agent Reports 0
---
Fund Administration Reports 0
---
Prospect Services Reports 0
---
Custody Reports 0
---
Data Warehouse Reports 0
---
---
---
Total number of services required 0
---
Total Monthly Fee (@ $125) $ 0
===
MFX DATA DELIVERY SERVICES
A. PERFORMANCE DELIVERY SERVICES
(1) DAILY NAV FEED
Daily automated feed of fund price and portfolio data to external
sites
Setup - $100/fund, $600 minimum (subject to degree of customization),
($2,500 Additional FTP setup per site or FTP address)
Service - $100/fund/month
Number of funds required 0
---
Total Monthly Fee (@ $100) $ 0
===
(2) STANDARD RATE OF RETURN SERVICES
Fund performance calculation (daily or periodic)
Setup - $500/fund* ($1,000/fund initial setup for non-fund
administration clients, $5,000 minimum), ($2,500 Additional FTP setup
per site or FTP address).
Number of sites required.
Pre-Tax Service - $200/fund/month**
Number of funds required 0
---
Total Monthly Fee (@ $200) $ 0
===
(3) AFTER-TAX PERFORMANCE SERVICES
Post-Tax Service - $300/fund/month**
Number of funds required
---
Total Monthly Fee (@ $300) $ 0
===
B. SFX - SECURE FILE EXCHANGE
(1) GUI - Graphical User Interface
No initial setup charge
$125/month/fund group (up to 5 file transfers)
Number of funds
---
Total Monthly Fee (@ $125) $ 0
===
(2) Automated file delivery to client site
$2,500 initial setup per site
$195/month - up to 5 automated file transfers
Number of funds
---
Total Monthly Fee (@ $195) $ 0
===
TOTAL MONTHLY FEE $ 0
===
SETUP FEE SUMMARY
MFS On-line Systems Access $--
Image/COLD On-line Access $--
ReportSource $--
Daily NAV Feed $--
Standard Rate of Return $--
Automated File Delivery $--
FTP Setup $--
---
TOTAL SETUP CHARGES $--
---
|
All prices exclude out-of-pocket expenses and, if necessary, hardware costs, travel, etc. All prices subject to change depending upon client requirements.
* Assumes that NAV/Distribution history is provided to U.S. Bancorp in Excel format, otherwise setup charge subject to change.
** Delivery up to 5 sites
Customization charged at $150/hour, if necessary.
Exhibit 99(i)
DORSEY & WHITNEY LLP
SUITE 1500
50 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
August 31, 2006
First American Investment Funds, Inc.
800 Nicollet Mall
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
We have acted as counsel to First American Investment Funds, Inc., a Maryland corporation (the "Company"), in rendering the opinion hereinafter set forth with respect to the authorization of the classes and series of the Company's common shares, par value $0.0001 per share, which are identified in Exhibit A to this opinion letter, which are also known by the names set forth opposite their respective class and series designations in Exhibit A. The shares of the Company identified in Exhibit A are referred to herein collectively as the "Shares."
We understand that the Shares are being registered under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, pursuant to the Company's Registration Statement on Form N-1A (File No. 33-16905) relating to such shares (the "Registration Statement"). In rendering the opinion hereinafter expressed, we have reviewed the corporate proceedings taken by the Company 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 the Company, certificates of public officials and of responsible officers of the Company, and other documents as we have deemed necessary as a basis for such opinion. As to the various matters of fact material to such opinion, we have, when such facts were not independently established, relied to the extent we deemed proper on certificates of public officials and of responsible officers of the Company. In connection with such review and examination, we have assumed that all copies of documents provided to us conform to the originals and that all signatures are genuine.
In addition, in rendering the opinion hereinafter expressed, we have assumed, with the concurrence of the Company, that all of the Shares will be issued and sold upon the terms and in the manner set forth in the Registration Statement; that the Company will not issue Shares in excess of the numbers authorized in the Company's articles of incorporation as in effect at the respective dates of issuance; and that the Company will maintain its corporate existence and good standing under the laws of the State of Maryland in effect at all times after the date of this opinion.
Based on the foregoing, it is our opinion that the Shares issued from and after the date hereof, when issued and delivered by the Company as described in the Registration Statement, will be legally issued and fully paid and non-assessable.
In rendering the foregoing opinion, we express no opinion as to the laws of any jurisdiction other than the State of Maryland. We hereby consent to the filing of this opinion letter as an exhibit to the Registration Statement.
Very truly yours,
/s/ Dorsey & Whitney LLP
---------------------------------------
JDA
|
Exhibit A to August 31, 2006 Dorsey & Whitney Opinion Letter to First American Investment Funds, Inc.
Designation of Shares in Articles of Incorporation or Articles Supplementary Name ------------------------------------ ---- Class B Common Shares................. Core Bond Fund, Class A Class B, Series 2 Common Shares....... Core Bond Fund, Class Y Class B, Series 3 Common Shares....... Core Bond Fund, Class B Class B, Series 4 Common Shares....... Core Bond Fund, Class C Class B, Series 5 Common Shares....... Core Bond Fund, Class R Class C Common Shares................. Intermediate Tax Free Fund, Class A Class C, Series 2 Common Shares....... Intermediate Tax Free Fund, Class Y Class I Common Shares................. Intermediate Term Bond Fund, Class A Class I, Series 2 Common Shares....... Intermediate Term Bond Fund, Class Y Class J Common Shares................. Short Term Bond Fund, Class A Class J, Series 2 Common Shares....... Short Term Bond Fund, Class Y Class M Common Shares................. Minnesota Intermediate Tax Free Fund, Class A Class M, Series 2 Common Shares....... Minnesota Intermediate Tax Free Fund, Class Y Class N Common Shares................. Colorado Intermediate Tax Free Fund, Class A Class N, Series 2 Common Shares....... Colorado Intermediate Tax Free Fund, Class Y Class X Common Shares................. Oregon Intermediate Tax Free Fund, Class Y Class X, Series 2 Common Shares....... Oregon Intermediate Tax Free Fund, Class A Class Y Common Shares................. California Intermediate Tax Free Fund, Class A Class Y, Series 2 Common Shares....... California Intermediate Tax Free Fund, Class Y Class DD Common Shares................ Tax Free Fund, Class A Class DD, Series 3 Common Shares...... Tax Free Fund, Class Y Class DD, Series 4 Common Shares...... Tax Free Fund, Class C Class EE Common Shares................ Minnesota Tax Free Fund, Class A Class EE, Series 3 Common Shares...... Minnesota Tax Free Fund, Class Y Class EE, Series 4 Common Shares...... Minnesota Tax Free Fund, Class C Class HH Common Shares................ High Income Bond Fund, Class A Class HH, Series 2 Common Shares...... High Income Bond Fund, Class B Class HH, Series 3 Common Shares...... High Income Bond Fund, Class Y Class HH, Series 4 Common Shares...... High Income Bond Fund, Class C Class HH, Series 5 Common Shares...... High Income Bond Fund, Class R Class I I Common Shares............... California Tax Free Fund, Class A Class I I, Series 2 Common Shares..... California Tax Free Fund, Class C Class I I, Series 3 Common Shares..... California Tax Free Fund, Class Y Class JJ Common Shares................ Arizona Tax Free Fund, Class A Class JJ, Series 2 Common Shares...... Arizona Tax Free Fund, Class C |
Designation of Shares in Articles of Incorporation or Articles Supplementary Name ------------------------------------ ---- Class JJ, Series 3 Common Shares...... Arizona Tax Free Fund, Class Y Class KK Common Shares................ Colorado Tax Free Fund, Class A Class KK, Series 2 Common Shares...... Colorado Tax Free Fund, Class C Class KK, Series 3 Common Shares...... Colorado Tax Free Fund, Class Y Class LL Common Shares................ Total Return Bond Fund, Class A Class LL, Series 2 Common Shares...... Total Return Bond Fund, Class B Class LL, Series 3 Common Shares...... Total Return Bond Fund, Class C Class LL, Series 4 Common Shares...... Total Return Bond Fund, Class Y Class LL, Series 5 Common Shares...... Total Return Bond Fund, Class R Class MM Common Shares................ Nebraska Tax Free Fund, Class A Class MM, Series 2 Common Shares...... Nebraska Tax Free Fund, Class C Class MM, Series 3 Common Shares...... Nebraska Tax Free Fund, Class Y Class ZZ Common Shares................ U.S. Government Mortgage Fund, Class A Class ZZ, Series 2 Common Shares...... U.S. Government Mortgage Fund, Class B Class ZZ, Series 3 Common Shares...... U.S. Government Mortgage Fund, Class C Class ZZ, Series 4 Common Shares...... U.S. Government Mortgage Fund, Class Y Class ZZ, Series 5 Common Shares...... U.S. Government Mortgage Fund, Class R Class AAA Common Shares............... Missouri Tax Free Fund, Class A Class AAA, Series 2 Common Shares..... Missouri Tax Free Fund, Class B Class AAA, Series 3 Common Shares..... Missouri Tax Free Fund, Class C Class BBB Common Shares............... Ohio Tax Free Fund, Class A Class BBB, Series 2 Common Shares..... Ohio Tax Free Fund, Class C Class BBB, Series 3 Common Shares..... Ohio Tax Free Fund, Class Y Class CCC Common Shares............... Short Tax Free Fund, Class A Class CCC, Series 2 Common Shares..... Short Tax Free Fund, Class Y Class DDD Common Shares............... Intermediate Government Bond Fund, Class A Class DDD, Series 2 Common Shares..... Intermediate Government Bond Fund, Class Y Class FFF Common Shares............... Inflation Protected Securities Fund, Class A Class FFF, Series 2 Common Shares..... Inflation Protected Securities Fund, Class C Class FFF, Series 3 Common Shares..... Inflation Protected Securities Fund, Class R Class FFF, Series 4 Common Shares..... Inflation Protected Securities Fund, Class Y |
Exhibit 99(p)(1)
First American Funds Code of Ethics Pursuant to Rule 17j-1 and Sarbanes-Oxley Act Section 406
Effective Date 4/14/2005
Board Approval Date 5/4/2005
Introduction
This Code of Ethics (the "Code") has been adopted by the Board of Directors of the First American Funds identified above (the "Funds") pursuant to Rule 17j-1 under the Investment Company Act of 1940 (the "1940 Act") and Section 406 of the Sarbanes-Oxley Act as implemented by Sub-Item 102P3 of Form N-SAR. Part One of this Code addresses the topics contemplated by Rule 17j-1. Part Two of this Code addresses the topics contemplated by Section 406 and Sub-Item 102P3. The Board of Directors may, by Board resolution, make this Code applicable to additional Funds, which are formed in the future.
Part One
Rule 17j-1 under the 1940 Act requires that registered investment companies adopt a written Code of Ethics containing provisions reasonably necessary to prevent Access Persons from engaging in certain activities prohibited by Rule 17j-1, and to use reasonable diligence and implement procedures reasonably necessary to prevent violations of such Code of Ethics.
The purpose of Part One of this Code is to establish policies consistent with Rule 17j-1 and with the following general principles:
- Access Persons have the duty at all times to place the interests of clients and shareholders ahead of their own personal interests in any decision relating to their personal investments.
- All Personal Securities Transactions shall be conducted consistent with Part One of this Code and in such manner as to avoid any actual, potential or appearance of a conflict of interest, or any abuse of an individual's position of trust and responsibility.
Access Persons shall not take inappropriate advantage of their position and must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders.
A. Definitions
1. "ACCESS PERSON" means any director or officer of the Funds. An employee of the Funds' investment adviser or any sub-adviser is not an Access Person under Part One of this Code.
2. "BENEFICIAL OWNERSHIP" of a Security is to be determined in the same manner as it is for purposes of Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "1934 Act"). This means that a person should generally consider themselves the "Beneficial Owner" of any Security in which they have a direct or indirect financial interest. In addition, persons should consider themselves the "Beneficial Owner" of any Security held by their spouse, registered domestic partner, minor children, relatives who share their home, or other persons by reason of any contract, arrangement, understanding, or relationship that provides them with sole or shared voting or investment power with respect to such Security. Although the following list is not exhaustive, under the 1934 Act and Part One of this Code, a person generally would be regarded to be the "Beneficial Owner" of the following Securities:
- Securities held in the person's own name;
- Securities held with another in joint tenancy, community property, or other joint ownership;
- Securities held by a bank or broker as nominee or custodian on such person's behalf or pledged as collateral for a loan;
- Securities held by members of the person's immediate family sharing the same household ("immediate family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, registered domestic partner, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships);
- Securities held by a relative not residing in the person's home if the person is a custodian, guardian or otherwise has or shares control over the purchase, sale, or voting of such Securities;
- Securities held by a trust in which the person is a beneficiary and has or shares the power to make purchase or sale decisions;
- Securities held by a trust for which the person serves as a trustee and in which the person has a pecuniary interest (including pecuniary interests by virtue of performance fees and by virtue of holdings by the person's immediate family);
- Securities held by a general partnership or limited partnership in which the person is a general partner;
- Securities owned by a corporation in which the person has a control position or in which the person has or shares investment control over the portfolio Securities (other than a registered investment company);
- Securities in a portfolio giving the person certain performance-related fees; and
- Securities held by another person or entity pursuant to any agreement, understanding, relationship or other arrangement giving the person any direct or indirect pecuniary interest.
3. "DISINTERESTED DIRECTOR" means a director of the Funds who is not an "interested person" of the Funds within the meaning of Section 2(a)(19) of the 1940 Act.
4. "FAF ADVISORS COMPLIANCE" means the department within FAF Advisors responsible for monitoring compliance with the requirements of Part One of this Code.
5. "INSIDER TRADING" means the use of Material Non-Public Information to trade in a Security (whether or not one is an Access Person) or the communication of Material Non-Public Information to others. Insider Trading generally includes:
a. Trading in a Security by an Access Person, while in possession of Material Non-Public Information;
b. Trading in a Security by a person who is not an Access Person, while in possession of Material Non-Public Information, where the information either was disclosed to such person in violation of an Access Person's duty to keep it confidential or was misappropriated; and
c. Communicating Material Non-Public Information to any person, who then trades in a Security while in possession of such information.
6. "MATERIAL NON-PUBLIC INFORMATION" means information that has not been effectively communicated to the marketplace, and for which there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's Securities. Examples of Material Non-Public Information include information regarding dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. Material non-public information about the Funds' holdings, the Funds' transactions, and the securities recommendations of the Funds' investment advisers and any sub-advisers is also included in this definition. Access Persons (including Disinterested Directors) are reminded that they have a duty to keep such information confidential.
7. "SECURITY" shall have the same meaning as it has in Section 2(a)(36) of the 1940 Act, but excluding direct obligations of the United States Government, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements, and shares of registered open-end investment companies.
8. "1940 ACT" means the Investment Company Act of 1940, as amended.
B. Prohibited Securities Transactions
1. No Access Person shall, in connection with the purchase or sale, directly or indirectly, by such person of a Security held or to be acquired by any Fund:
a. Employ any device, scheme or artifice to defraud the Fund;
b. Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
c. Engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any Fund; or
d. Engage in any manipulative practice with respect to any Fund.
2. No Access Person shall purchase or sell, directly or indirectly, any Security in which he or she has or thereby acquires any Beneficial Ownership where such purchase or sale constitutes Insider Trading, or take any other action that constitutes or may result in Insider Trading.
3. No Access Person shall purchase or sell, directly or indirectly, any Security in which he or she has or thereby acquires any Beneficial Ownership and which to his or her actual knowledge at the time of such purchase or sale such Security is being purchased or sold by any Fund, or has been recommended to be purchased or sold by any Fund.
4. Paragraphs 2 and 3 of this section shall not apply to the following:
a. Transactions for any account over which the Access Person has no direct or indirect influence or control;
b. Involuntary transactions by the Access Person or any Fund;
c. Purchases under an automatic dividend reinvestment plan; or
d. Purchases affected by the exercise of rights, issued by an issuer pro-rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer.
C. Reports
1. ACCESS PERSONS. Each Access Person (except Disinterested Directors, whose entire reporting requirements are set forth in subsection B below) shall make the following reports required by Rule 17j-1(d) under the 1940 Act:
a. Initial and Annual Securities Holdings Reports. Within 10 calendar days of becoming an Access Person, and annually thereafter as required by the Adviser, Access Persons shall disclose all personal Securities holdings other than the exempt securities set forth in Section A.7. Compliance with this reporting requirement will be satisfied by providing monthly statements of brokerage accounts provided the statements are current within 30 days. Reports for Securities not included in such brokerage statements (for example, Securities held in trust accounts in which an Access Person has Beneficial Ownership) must contain:
1) the title, number of shares, and principal amount of each Security in which the Access Person has any Beneficial Ownership;
2) the name of any broker, dealer, or bank with whom the Access Person maintains an account in which any Securities are held for the direct or indirect benefit of the Access Person; and
3) the date the report is submitted by the Access Person.
b. Quarterly Transaction Reports. Within 30 calendar days of the end of each quarter, Access Persons shall report all Securities transactions other than the exempt Securities set forth in the definition of "Security" above in which each has, or by reason of such transactions acquires, any Beneficial Ownership. In the event that no reportable transactions occurred during the quarter, Access Persons should note this on the report. Compliance with this reporting requirement will be satisfied by providing brokerage account statements current as of quarter end. Reports for Securities not included in such brokerage statements (for example, Securities held in trust accounts in which an Access Person has Beneficial Ownership) must contain:
1) the date of each transaction, the title, the interest rate and maturity (if applicable), the number of shares and the principal amount of each Security;
2) the nature of each transaction (i.e., purchase, sale, or any type of acquisition or disposition);
3) the price of the Security at which each transaction was effected;
4) the name of the broker, dealer or bank with or through which each transaction was effected;
5) the name of any broker, dealer, or bank with whom the Access Person established an account in which any Securities are held for the direct or indirect benefit of the Access Person and the date on which the account was established; and
6) the date the report is submitted by the Access Person.
Transactions in First American Closed-End Funds. Access Persons are reminded to contact FAF Advisors Compliance before executing any transaction in a First American Closed-End Fund to ensure the timely completion of Section 16 reporting requirements. Under these requirements Form 4 is required to be filed with the U.S. Securities and Exchange Commission ("SEC") within 2 days of the reportable transaction.
2. DISINTERESTED DIRECTORS. A Disinterested Director need not file Initial or Annual Securities Holdings Reports, and need only file Quarterly Transaction Reports. In the Quarterly Transaction Reports a Disinterested Director shall only report transactions in a Security if such Disinterested Director knows at the time of such transaction or, in the ordinary course of fulfilling his or her official duties as director, should have known during the 15 day period immediately preceding or after the date of the transaction, that such Security was or would be purchased or sold by any Fund or was or would be considered for purchase or sale by any Fund or its investment advisor or sub-advisor. The "should have known" standard implies no duty of inquiry, does not presume there should have been any deduction or extrapolation from discussions or memoranda dealing with tactics to be employed meeting the Funds' investment objectives, or that any knowledge is to be imputed because of prior knowledge of the Funds' portfolio holdings, market considerations, or the Funds' investment policies, objectives and restrictions.
Transactions in First American Closed-End Funds. Disinterested Directors are reminded to contact FAF Advisors Compliance before executing any transaction in a First American Closed-End Fund to ensure the timely completion of Section 16 reporting requirements. Under these requirements Form 4 is required to be filed with SEC within 2 days of the reportable transaction.
D. Enforcement
FAF Advisors Compliance shall review reports filed under Part One of this Code to determine whether any violation may have occurred. Access Persons who discover a violation or apparent violation of Part One of this Code by any other person covered by Part One of this Code shall bring the matter to the attention of FAF Advisors Compliance.
Each violation of or issue arising under Part One of this Code shall be reported to the Board of Directors of the Funds at or before the next regular meeting of the Board.
The Board of Directors of the Funds may impose such sanctions or penalties upon a violator of Part One of this Code as it deems appropriate under the circumstances.
E. Recordkeeping
FAF Advisors Compliance shall maintain the appropriate records and reports related to Part One of this Code as required by Rule 17j-1(d) under the 1940 Act.
Part Two
A. Covered Officers; Purpose of Part Two;
Definitions
1. COVERED OFFICERS. The persons who are subject to Part Two of this Code (the "Covered Officers") are the Funds' principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Funds or by a third party. At the date set forth in the caption of this Code, the only Covered Officers of the Funds were the Funds' President and their Treasurer.
Part Two of this Code also applies to members of each Covered Officer's immediate family who live in the same household as the Covered Officer. Therefore, for purposes of interpretation, each obligation, requirement or prohibition that applies to a Covered Officer also applies to such immediate family members. For this purpose, the term "immediate family" has the meaning set forth in Section 1B(4) of Part One of this Code.
2. PURPOSE. The purpose of Part Two of this Code is to deter wrongdoing and to promote:
a. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
b. Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by the Funds;
c. Compliance with applicable laws and governmental rules and regulations;
d. The prompt internal reporting of violations of Part Two of this Code to FAF Advisors Compliance; and
e. Accountability for adherence to Part Two of this Code.
3. DEFINED TERMS. Capitalized terms which are used in Part Two of this Code and which are not otherwise defined in Part Two have the meanings assigned to them in Part One of this Code.
B. Covered Officers Should Handle Actual and Apparent Conflicts of Interest Ethically
1. GENERAL. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her immediate family living in the same household, received improper personal benefits as a result of his or her position with the Funds.
Certain conflicts of interest to which Covered Officers may be subject arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the 1940 Act and the Investment Advisers Act of 1940 (the "Investment Advisers Act"). For example, under the 1940 Act, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Funds because of their status as "affiliated persons" of the Funds. The Funds' and FAF Advisors' compliance policies and procedures are designed to prevent, or identify and correct, violations of these provisions. Part Two of this Code does not, and is not intended to, repeat or replace these policies and procedures, and such conflicts fall outside of the parameters of Part Two.
Although typically not presenting an opportunity for improper personal benefit, conflicts also may arise from, or as a result of, the contractual relationships between the Funds and other entities of which the Covered Officers are also officers or employees, such as FAF Advisors. As a result, Part Two of this Code recognizes that the Covered Officers may, in the normal course of their duties for the Funds and such other entities, be involved in establishing policies and implementing decisions, which
will have different effects on the Funds and such other entities. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and such other entities and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the 1940 Act and, to the extent applicable, the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Board of Directors that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other Codes.
Other conflicts of interest to which Covered Officers are subject are covered by Part Two of this Code, even if such conflicts of interest are not subject to provisions in the 1940 Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under Part Two of this Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed before the interest of the Funds.
Each Covered Officer must:
a. Not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally;
b. Not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; and
c. Not intentionally or recklessly take or direct any action or failure to act that results in any SEC filing or other public communication by the Funds being materially misleading, while personally benefiting such Covered Officer.
2. GIFTS AND ENTERTAINMENT. A Covered Officer must not solicit, allow himself or herself to be solicited, or accept gifts, entertainment, or other gratuities intended to or appearing to influence decisions or favors toward the Funds' business to or from any client, potential client, Fund vendor or potential vendor. A Covered Officer may not give or accept gifts with a value exceeding $100, even if the gift does not oblige or influence the Covered Officer, or is not intended to influence another. Notwithstanding this, a Covered Officer may accept or provide reasonable business meals and entertainment if the client, potential client, Fund vendor or potential vendor is physically present at the business meal or entertainment. In the event that any such business meal or entertainment has a value exceeding $100 per person, the Covered Officer must promptly report the meal or entertainment to FAF Advisors Compliance, which shall maintain a record of such meals and entertainment and shall report such matter to the Board of Directors of the Funds at or before the next regular meeting of the Board.
C. Disclosure and Compliance
1. FAMILIARITY WITH DISCLOSURE REQUIREMENTS. Each Covered Officer shall familiarize himself or herself with the disclosure requirements generally applicable to the Funds.
2. AVOIDING MISREPRESENTATIONS. Each Covered Officer shall not knowingly misrepresent, or knowingly cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' directors, auditors or counsel, or to governmental regulators or self-regulatory organizations.
3. PROMOTING ACCURATE DISCLOSURE. Each Covered Officer shall, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and their service providers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds.
4. PROMOTING COMPLIANCE. Each Covered Officer shall, to the extent appropriate within his or her area of responsibility, promote compliance with the Funds' compliance policies and procedures adopted pursuant to Rule 38a-1 under the 1940 Act and with the laws, rules and regulations applicable to the Funds.
D. Reporting; Amendment and Waivers
1. ACKNOWLEDGEMENT OF PART TWO. Upon first becoming subject to Part Two of this Code and annually at the end of each calendar year, each Covered Officer shall affirm in writing to FAF Advisors Compliance that he or she has received, read and understands Part Two of this Code.
2. REPORTING OF VIOLATIONS. Each Covered Officer shall report any violation of Part Two of this Code of which he or she becomes aware (whether committed by himself or herself or by another Covered Officer) to FAF Advisors Compliance promptly after becoming aware of such violation. FAF Advisors Compliance shall report any material violation of Part Two of this Code of which it becomes aware, whether though a report by a Covered Officer or otherwise, to the Board of Directors of the Funds at or before the next regular meeting of the Board, together with FAF Advisors Compliance's recommendation for the action, if any, to be taken with respect to such violation. The Board of Directors of the Funds may impose such sanctions or penalties upon a violator of Part Two of this Code as it deems appropriate under the circumstances.
3. AMENDMENTS AND WAIVERS. Amendments to, and waivers of the provisions of, Part Two of this Code may be adopted or granted by the Funds' Board of Directors. Such amendments and waivers shall be disclosed to the public in one of the manners specified in Sub-Item 102P3 of Form N-SAR.
Exhibit 99(p)(2)
FAF ADVISORS(TM)LOGO
FAF ADVISORS
CODE OF ETHICS
APPROVED BY THE FIRST AMERICAN FUNDS
BOARD OF DIRECTORS 12/8/2005
TABLE OF CONTENTS
INTRODUCTION............................................................... 1
PERSONAL SECURITIES TRANSACTIONS........................................... 2
A. Who Is Covered by this Section?..................................... 4
B. Which Securities and Accounts Are Covered?.......................... 4
C. What Types of Transactions Require Reporting but not Pre-clearing?.. 6
D. What Are the Restrictions on Trading Shares of the First
American Funds?..................................................... 7
E. What Are Blackout Periods?.......................................... 7
F. Are There any Restrictions on Short-Term Trading?................... 7
G. Are There Any Prohibitions for Personal Trading in Small-Mid
Cap Stocks?......................................................... 8
H. What Reports and Disclosures Do Access Persons Need to Make?........ 8
I. Special Discretion.................................................. 9
INSIDER TRADING POLICY AND PROCEDURES...................................... 10
A. Insider Trading Is Prohibited....................................... 10
B. FAF Advisors "Information Barriers" Procedures...................... 11
C. Quarterly Certification............................................. 11
OTHER CONFLICTS OF INTEREST................................................ 11
A. May I Provide Investment Advice to Others?.......................... 11
B. May I Serve as a Director of Another Company?....................... 12
C. When May I Disclose Confidential Information?....................... 12
D. May I Give or Receive Gifts?........................................ 12
E. May I Make Political and Charitable Contributions?.................. 13
ENFORCEMENT OF THE CODE AND SANCTIONS...................................... 13
GLOSSARY................................................................... 15
EXHIBIT 1.................................................................. 19
ACKNOWLEDGMENT AND AGREEMENT TO COMPLY.................................. 19
EXHIBIT 2.................................................................. 20
CODE OF ETHICS CONTACT LIST............................................. 20
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INTRODUCTION
WHY DO WE NEED THE CODE OF ETHICS?
As an investment adviser, client and fund shareholder trust is our most valuable asset. Our success largely depends on the degree of trust our clients and fund investors bestow upon us. All of us at FAF Advisors, Inc. ("FAF Advisors") are responsible for maintaining that trust, and must conduct ourselves in the very highest ethics standards. We must always place the interests of clients and fund shareholders ahead of our own and avoid actual and apparent conflicts of interest. It is not enough for us to simply comply with the letter of the law. We must observe exemplary standards of honesty and integrity above and beyond the minimal legal requirements. To that end, we have adopted this Code of Ethics to help guide our conduct when the interests of our clients may not be aligned with our individual interests or the interests of FAF Advisors. In particular, this Code deals with:
- Our commitment to honest and ethical conduct;
- Individual accountability;
- Personal securities transactions;
- Trading on inside or confidential information;
- Safeguarding client and fund confidential information;
- Giving and receiving gifts;
- Outside professional opportunities; and
- Adherence to the laws, rules, and regulations that govern our business.
This Code does not attempt to identify all possible conflicts of interest, and literal compliance with each of its specific provisions will not shield you from liability for personal trading or other conduct that violates a fiduciary duty to clients and shareholders. Violations of this Code and federal securities laws may result in sanctions, fines, suspension and/or termination of employment, SEC administrative actions, and in some cases civil or criminal penalties.
This Code is an expression of our commitment to an ethical work place and is an integral element of the control environment required under federal law. If you are aware of any violation or suspected violation of the Code, you must promptly report it to the Compliance Department. You may also report it to the CEO, General Counsel or any other officer of FAF Advisors. The officers of FAF Advisors and the FUNDS are required to report any violation or suspected violation to the Chief Compliance Officer. It is a violation of the Code to retaliate against or harass, in any manner, any person who reports any violation or suspected violation of the Code. In addition to this Code, you are subject to U.S. Bank's Code of Ethics and may be subject to the Code of Ethics Conduct adopted by the First American Funds (the "FUNDS"). Copies of these Codes may be obtained from the Compliance Department. While these codes of conduct are designed to address differing business environments and legal obligations, they are all designed to promote honest and ethical conduct. IF YOU BELIEVE THAT THESE OR OTHER CODES OF CONDUCT IMPOSE CONFLICTING OBLIGATIONS ON YOU, YOU SHOULD CONTACT THE COMPLIANCE DEPARTMENT IMMEDIATELY.
This Code applies to temporary or contract workers and consultants whose assignments exceed four weeks or whose cumulative assignments exceed eight weeks over a twelve-month period.
The Code applies to all FAF Advisors ACCESS PERSONS, and you must certify annually that you have received a copy of the Code, that you have been in compliance, and that you will continue to comply with its terms. (Exhibit 1)
This Code is divided into five sections:
1. Personal transactions in securities and related financial instruments by ACCESS PERSONS;
2. Access to and the use of confidential and non-public information when trading for client or personal accounts;
3. Safeguarding client and fund confidential information;
4. Other types of conduct that may impact or appear to impact our objectivity in dealing with our clients, suppliers, and business partners; and
5. Sanctions for violation of the Code.
IF YOU HAVE ANY QUESTIONS ABOUT FAF ADVISORS' POLICIES ON PERSONAL SECURITIES TRANSACTIONS, INSIDER TRADING, CONFLICTS OF INTEREST OR ANY OTHER ASPECT OF THE CODE, PLEASE REFER TO THE CONTACT LIST (EXHIBIT 2).
PERSONAL SECURITIES TRANSACTIONS
Typically, you have a BENEFICIAL INTEREST in accounts maintained in your own name, joint accounts and accounts of your spouse or registered domestic partner, dependents, and other immediate family members sharing the same household. IF YOU HAVE ANY DOUBT ABOUT THE STATUS OF AN ACCOUNT, PLEASE CONTACT THE COMPLIANCE DEPARTMENT.
Buying and selling SECURITIES for accounts in which you have a BENEFICIAL INTEREST may conflict (or appear to conflict) with the interests of our clients for many reasons, including buying or selling a SECURITY close in time to a client transaction, or buying or selling a SECURITY for yourself instead of our clients. This section of the Code establishes rules for minimizing and managing these conflicts.
In the sections that follow, we will explain whether you (including your immediate family and possible others who are closely connected to you, see "BENEFICIAL INTEREST") are covered by
these personal transaction rules and describe the types of accounts, SECURITIES, and transactions that are subject to these rules. If you are covered by these rules and are involved in a covered transaction you must take the following steps:
Many of these rules use complex, technically defined terms. To make these rules easier to understand, we have capitalized defined terms and included a hyperlink to the definition if you need more detail. Printed versions of the Code include a table of defined terms.
SECURITIES include exchange- and OTC-traded instruments, as well as financial futures, derivatives and other related instruments. See Glossary.
1. Annually, you must disclose to FAF Advisors each account (other than bank checking or other deposit account) that you maintain for holding, buying or selling SECURITIES and related financial instruments.
2. Annually, you must disclose to FAF Advisors all of your personal holdings in SECURITIES and related financial instruments.
3. Quarterly, you must disclose to FAF Advisors all of you transactions in SECURITIES and related financial instruments.
4. Before buying or selling any covered SECURITY, you may be required to pre-clear that purchase or sale.
5. Following each purchase or sale of a SECURITY, your broker-dealer (or other agent) must send to FAF Advisors a duplicate confirmation of the terms of the transaction.
There are certain times when you may not buy or sell for your own account, and there are certain types of transactions that you may not enter into. Detailed information on these restrictions is provided below.
In addition, to streamline our monitoring process, FAF Advisors requires you (and accounts in which you hold SECURITIES) to effect transactions through accounts maintained at:
- E*Trade;
- Fidelity Investments;
- Merrill Lynch;
- Piper Jaffray;
- Schwab;
- TD Waterhouse;
- Ameritrade;
- U.S. Bancorp Investments;
- U.S. Bancorp Private Client Group; or
- Salomon Smith Barney for the holding of USB Stock Options.
An exception to this requirement may only be granted under very limited circumstances, must be specifically authorized by the Compliance Department, a signed copy of the exception must be kept in your file, and you must submit reports of personal transactions.
AS AN FAF ADVISORS ACCESS PERSON, YOUR ABILITY TO CONDUCT PERSONAL SECURITIES TRANSACTIONS IS A PRIVILEGE NOT A RIGHT. AT FAF ADVISORS WE MUST PUT OUR FUNDS' AND CLIENTS' INTERESTS FIRST. PLEASE NOTE THAT THERE MAY BE TIMES WHEN YOU ARE UNABLE TO PRE-CLEAR OR EFFECT TRANSACTIONS BECAUSE THE SYSTEM IS UNAVAILABLE (OR FOR ANY OTHER REASON).
A. WHO IS COVERED BY THIS SECTION?
ACCESS PERSONS typically include trading and portfolio management assistants, sales and marketing, product, operations and IT employees. RESTRICTED ACCESS PERSONS include research analysts, traders, portfolio/fund managers, executive management, members of the Legal and Compliance Departments, and their executive or departmental assistants. EACH EMPLOYEE WILL BE ADVISED WITH RESPECT TO THEIR STATUS AS AN ACCESS PERSON OR RESTRICTED ACCESS PERSON.
The potential for a conflict of interest arises if you have access to non-public information about our clients' or FUNDS' transactions or holdings or about securities research and recommendations. This Code refers to employees with access to this kind of information as ACCESS PERSONS. ACCESS PERSONS generally include any employees who are in a position to exploit information about client securities transactions or holdings. All FAF Advisors and PAM employees are deemed ACCESS PERSONS, with certain employees being classified as RESTRICTED ACCESS PERSONS. If you are actually involved in making investment recommendations to our clients, participate in the determination of which investment recommendations will be made, have the power to influence management of the Funds, execute trades for any Fund or client accounts, or are a PAM employee, this Code refers to you as a RESTRICTED ACCESS PERSON. RESTRICTED ACCESS PERSONS are subject to all the requirements imposed on ACCESS PERSONS. RESTRICTED ACCESS PERSONS are also subject to certain other requirements.
B. WHICH SECURITIES AND ACCOUNTS ARE COVERED?
Approval for INITIAL PUBLIC OFFERINGS and PRIVATE PLACEMENTS will take into account, among other factors, whether the investment opportunity should be reserved for clients and whether the opportunity is being offered to the ACCESS PERSON by virtue of his or her relationship to FAF Advisors or any fund sponsored or managed by FAF Advisors.
This Code applies to SECURITIES and accounts in which you have a BENEFICIAL INTEREST. Generally, you have a BENEFICIAL INTEREST in any SECURITY or account in which you have a financial interest or have or share investment discretion. There may be accounts in which you have a financial interest but do not have investment discretion. Because these accounts involve lower risks of a conflict with our clients, FAF Advisors may exempt them from the pre-clearance or reporting obligations of the Code. These ACCOUNTS may include trust accounts and accounts over which you have given investment discretion to a third party. If you believe an exemption should apply to an ACCOUNT in which you have an interest, please contact the Compliance Department. Exceptions will be granted under very limited circumstances, must be specifically authorized by the Compliance Department, a signed copy of the exception must be kept in your file, and you must submit reports of personal transactions.
ACCESS PERSONS must pre-clear transactions in SECURITIES, with the Compliance Department:
Only day orders will be approved. Good until cancelled ("GTC"), stop loss, and similar orders are not permitted. Limit orders must be executed the day approved.
1. Publicly traded SECURITIES (including options and futures on SECURITIES);
2. Privately placed SECURITIES (including options on SECURITIES);
3. INITIAL PUBLIC OFFERINGS; and
4. Debt New Issue Offerings, corporate and municipal bonds.
Transactions, except those involving PRIVATE PLACEMENTS, must be executed by THE CLOSE OF THE NYSE THE SAME DAY APPROVAL IS GIVEN. If a transaction is not executed that day, a new approval must be obtained from the Compliance Department.
TRANSACTIONS IN THE FOLLOWING EXEMPT SECURITIES DO NOT REQUIRE REPORTING OR
PRE-CLEARANCE:
1. Direct obligations of the Government of the United States;
2. Bankers' acceptance, bank certificates of deposit, commercial paper;
3. High-quality short-term debt instruments including repurchase agreements;
4. Shares of open-end mutual funds for which FAF Advisors does not serve as investment adviser or sub-adviser; and
5. First American Money-Market Funds.
In addition, while the transactions in the securities listed below require pre-clearance, they will normally be approved in the absence of special circumstances. Pre-clearance is essential for compliance with federal securities laws. Failure to pre-clear these or any other transaction under the Code will be treated as a serious violation of the Code. In addition, transactions in these securities are not subject to a BLACKOUT PERIOD.
1. SECURITIES whose performance are directly tied to a broad-based, publicly traded market basket or index of stocks (e.g., SPDRS, QQQ, Diamonds);
2. U.S. Bancorp stock, except during a blackout period when trading of U.S. Bancorp stock by its employees is restricted;
3. Shares of issuers included in the S&P 100;
4. Shares of issuers included in the S&P 500 stocks by ACCESS PERSONS WHO ARE NOT RESTRICTED ACCESS PERSONS in amounts less than $25,000 in any single trading day; and
5. SHARES of issuers included in the Russell 1000 stocks by ACCESS PERSONS WHO ARE NOT RESTRICTED ACCESS PERSONS in amounts less than $10,000 in any single trading day.
C. WHAT TYPES OF TRANSACTIONS REQUIRE REPORTING BUT NOT PRE-CLEARING?
BLACKOUT PERIODS are periods when you may not be permitted to buy or sell a SECURITY. See Section E, below.
PRE-CLEARANCE and BLACKOUT PERIODS do not apply to the following transactions:
1. Purchases which are part of an automatic dividend reinvestment plan ("DRIP");
2. Purchases of an employer's stock under an employer-sponsored plan (including the employer of a spouse or registered domestic partner);
3. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent the rights were acquired from the issuer; and any sales of these rights;
4. Purchases or sales that are non-volitional on the part of the ACCESS PERSON, including purchases or sales upon exercise of puts or calls written by the person (please note that you are prohibited from engaging in short-term trading), non-volitional sales from a margin account pursuant to a bona fide margin call; purchases or sales as part of divorce settlement or decree, and any other purchases or sales as determined by the Compliance Department upon request;
5. Purchases or sales of units of common/collective trust funds;
6. Transactions in derivative SECURITIES linked to physical commodities, such as exchange-trade futures contracts on physical commodities, options on such contracts and over-the-counter derivatives related to physical commodities; and
7. Purchases and sales of First American Funds that are not through an automatic investment plan, and that are not otherwise reported electronically, must be reported to the Compliance Department in writing.
D. WHAT ARE THE RESTRICTIONS ON TRADING SHARES OF THE FIRST AMERICAN FUNDS?
FAF Advisors discourages excessive trading of any non-money market series of the FUNDS. As described in the FUNDS' prospectuses, the FUNDS' Board of Directors has adopted policies and procedures designed to detect and deter trading in the FUNDS' shares that may disadvantage long-term FUND shareholders. As a part of these policies and procedures, FAF Advisors monitors all employees' trading of non-money market series of the FUNDS, including trading that occurs in your 401(k) account.
E. WHAT ARE BLACKOUT PERIODS?
Because of the potential for a conflict of interest, FAF Advisors has established certain BLACKOUT PERIODS when ACCESS PERSONS are not permitted to effect transactions in certain SECURITIES:
1 ACCESS PERSONS who are members of IAG may not buy or sell any SECURITY on the same business day as any IAG client of FAF Advisors or FUNDS.
2. RESTRICTED ACCESS PERSONS of IAG may not buy or sell any SECURITY for a period of 5 business days before or after any client account or the FUNDS (i) for which the RESTRICTED ACCESS PERSON is the portfolio/fund manager or has the power to influence management; or (ii) for which the RESTRICTED ACCESS PERSON is involved in making investment recommendations, participates in determining which investment recommendations will be made, or executes trades.
3. RESTRICTED ACCESS PERSONS of PAM may not buy or sell any SECURITY
for a period of 5 business days before or after any client
account (i) for which the RESTRICTED ACCESS PERSON is the
portfolio/fund manager or has the power to influence management;
(ii) for which the RESTRICTED ACCESS PERSON is involved in making
investment recommendations, participates in determining which
investment recommendations will be made, or executes trades: or
(iii) within 24 hours of that SECURITY being the subject of a
change in the Active Core Equity Guidance Process ("ACE").
Transactions for the accounts of our clients are confidential and may contain market sensitive data. Portfolio managers (whether IAG or PAM), trading personnel and others shall maintain the confidentiality of such information and should only disclose transactional and holdings information on a need-to-know basis.
F. ARE THERE ANY RESTRICTIONS ON SHORT-TERM TRADING?
This prohibition may limit your ability to use options and futures strategies. In addition, special rules apply to roll transactions. Prior to engaging in these types of transactions you should consult with the Compliance Department.
RESTRICTED ACCESS PERSONS are prohibited from profiting from a purchase and sale, or sale and purchase, of the same SECURITY (other than EXEMPT SECURITIES and derivative SECURITIES linked to physical commodities) WITHIN 60 CALENDAR DAYS.
The restriction may be waived by the Compliance Department in special circumstances provided that the transaction would not be inconsistent with the expressed purpose of this Code and any client transaction.
G. ARE THERE ANY PROHIBITIONS FOR PERSONAL TRADING IN SMALL-MID CAP STOCKS?
No, unless you are a Fund Manager, Analyst or Trader for any series of the equity FUNDS. Fund Managers, Analysts and Traders of the equity FUNDS are prohibited from buying SECURITIES of companies with a market capitalization of $10 billion or less, except as may be approved by the CIO (or the Head of Equities). In addition to approval from the CIO (or the Head of Equities), the employee must still pre-clear through regular Compliance pre-clearance procedures, all purchases and sales of such securities prior to trading.
H. WHAT REPORTS AND DISCLOSURES DO ACCESS PERSONS NEED TO MAKE?
In order to ensure that the provisions of this Code are being observed, each ACCESS PERSON is required to make the following disclosures to FAF Advisors:
Account and holdings disclosure requirements may be satisfied electronically. You will be asked to certify electronically your account/holdings disclosures annually.
1. ACCOUNTS DISCLOSURE. Within 10 calendar days of becoming an ACCESS PERSON, and within 45 days of the end of each calendar year, you must disclose all accounts in which you have a BENEFICIAL INTEREST.
2. INITIAL HOLDINGS DISCLOSURE. Within 10 calendar days of becoming an ACCESS PERSON, you must disclose all personal holdings of SECURITIES in which you have a BENEFICIAL INTEREST to the Compliance Department in writing.
Annual reporting requirements include holdings in DRIP programs, purchases of stock under an employer-sponsored plan, purchases affected upon the exercise of rights and non-volitional purchases or sales, such as the exercise of options.
3. ANNUAL HOLDINGS DISCLOSURE. If you maintain your accounts at an approved broker you must certify within 45 days of the end of each calendar year that the electronic record of your holdings provided by your broker is complete and accurate. If you do not maintain your account with an approved broker you must within 45 days of the end of each calendar year, disclose all personal holdings of SECURITIES in which you have a BENEFICIAL INTEREST to the Compliance Department in writing.
4. DUPLICATE CONFIRMATIONS. Each ACCESS PERSON must instruct each broker-dealer carrying an account in which he or she has a BENEFICIAL INTEREST to send to FAF Advisors a duplicate copy of all transaction confirmations generated for the account. We have arranged to receive electronic copies of trade confirmations from the approved brokers.
5. QUARTERLY TRANSACTION STATEMENTS. You must certify quarterly all SECURITIES transactions other than transactions in exempt securities for accounts in which you have BENEFICIAL INTEREST during the previous quarter. (In the event no reportable transactions occurred during the quarter, the report should be so noted.) Quarterly reports must be made no later than 30 days after the end of the calendar quarter and will be completed electronically through the CTI iTrade application.
I. SPECIAL DISCRETION
The Chief Compliance Officer shall have the authority to exempt any person or class of persons from all or a portion of the Code provided that:
1. The Chief Compliance Officer determines, that the particular application of all or a portion of the Code is not legally required;
2. The Chief Compliance Officer determines that the likelihood of any abuse of the Code by such exempted person(s) is remote; and
3. The terms or conditions upon which any such exemption is granted is evidenced in a written instrument.
The Chief Compliance Officer shall also have the authority to impose such additional requirements or restrictions as it, in its sole discretion, determines appropriate or necessary. Any exemption, and any additional requirement or restriction, may be withdrawn by the Chief Compliance Officer at any time.
INSIDER TRADING POLICY AND PROCEDURES
It is a violation of the trust of our clients and of federal securities laws to trade on the basis of material nonpublic information when one owes a duty of trust or confidence to the source of the information or when one has misappropriated the information in breach of a duty of trust or confidence.
Persons who fraudulently misuse material nonpublic information are subject to individual civil and criminal penalties (including imprisonment), SEC administrative actions and discipline including fines and suspension from the industry, and FAF Advisors disciplinary sanctions that may include reprimands, fines or dismissal from employment. In addition, FAF Advisors ACCESS PERSONS who fraudulently misuse material nonpublic information subject FAF Advisors to potential civil and criminal penalties as well as regulatory sanctions.
A. INSIDER TRADING IS PROHIBITED.
Officers, directors and employees of Advisors and PAM must preserve the confidentiality of any MATERIAL NON-PUBLIC INFORMATION that they become aware of and, while in possession of material nonpublic information, must abstain from trading until the inside information is publicly disclosed. If you believe that you possess MATERIAL NON-PUBLIC INFORMATION you must take the following steps:
1. Immediately inform the Legal or Compliance Department and follow the instructions given by the Legal or Compliance Department.
2. You must not disclose material nonpublic information to any person unless authorized to do so by FAF Advisors' legal counsel (including the Legal Department or outside counsel).
3. While in possession of material nonpublic information, you must not purchase or sell or recommend or direct the purchase or sale of that security (or related SECURITIES) for any FAF Advisors client, FAF Advisors (including its affiliates), yourself, any account in which you have a BENEFICIAL INTEREST, or any other person.
4. Material non-public information must be disseminated to the general public before you are permitted to enter into transactions in the affected security. Whether material non-public information meets this standard may only be determined by FAF Advisors' legal counsel (including the Legal Department or outside counsel).
5. The foregoing prohibitions apply not only to the SECURITIES of the issuers to which the material nonpublic information is directly related but also to any other SECURITIES (for example, SECURITIES of companies in the same industry) that may reasonably be expected to be affected by the public disclosure of the material nonpublic information.
In short, there are no circumstances in which any person who comes into possession of MATERIAL NONPUBLIC INFORMATION, by whatever means (whether FAF Advisors business, happenstance or any other means), may use that information to trade for personal benefit or for the benefit of any advisory client (including mutual funds).
FOR ADDITIONAL INFORMATION ON INSIDER TRADING PROCEDURE, YOU SHOULD CONTACT THE LEGAL OR COMPLIANCE DEPARTMENTS.
IF THERE IS EVER A QUESTION WITH RESPECT TO WHETHER INFORMATION IS MATERIAL OR PUBLIC, YOU SHOULD CONTACT THE COMPLIANCE OR LEGAL DEPARTMENT FOR ADVICE.
B. FAF ADVISORS "INFORMATION BARRIERS" PROCEDURES.
There are many circumstances where FAF Advisors ACCESS PERSONS may come into possession of material nonpublic information, including meetings with corporate management. In appropriate circumstances, the Legal or Compliance Departments may isolate material non-public information by imposing "information barriers" around the employee or employees who possess the information. These information barriers are designed to maintain the confidentiality of the information while, at the same time, permitting unaffected employees to continue to provide services to our clients. While the exact nature of an information barrier must take the specific circumstances into account, the following steps should be considered:
1. Placing the issuer or its securities on a restricted or watch list;
2. Limiting participation by employees in meetings, conferences, or telephone calls to discuss;
3. Limiting written, electronic, and verbal communication about the issuer or its securities;
4. Limiting access to offices, computers, files and trading systems; and
5. Securing documents and records.
The cardinal principle underlying FAF Advisors' information barriers is that material nonpublic information must be treated as confidential and confined to those FAF Advisors ACCESS PERSONS who have a "need to know" the information. In some circumstances, information barriers may not be effective and the Legal or Compliance Departments may take other steps, including, if necessary, halting trading in the issuer or its securities by the FUNDS, other clients, and employees.
Senior management of FAF Advisors is responsible for the oversight of the procedures that control the flow of any material nonpublic information within FAF Advisors, and between FAF Advisors and its affiliates.
C. QUARTERLY CERTIFICATION.
Every quarter you must certify that you have been in compliance and will continue to comply with the Insider Trading Policy and Procedures. The Quarterly Certification may be completed electronically through CTI iTrade.
OTHER CONFLICTS OF INTEREST
A. MAY I PROVIDE INVESTMENT ADVICE TO OTHERS?
You are prohibited from engaging in outside business or investment activities that may interfere with your duties with FAF Advisors or potentially impair FAF Advisors' reputation. For these reasons, you may not provide investment advice to anyone other than FAF Advisors clients (including the FUNDS) without prior written authorization from the Legal or Compliance Department.
B. MAY I SERVE AS A DIRECTOR OF ANOTHER COMPANY?
You are prohibited from serving as a member of the board of directors (or other advisory board) of any publicly traded company absent prior authorization by the ICCC and the FUNDS' Board of Directors. Authorization, when granted, will only be given if (i) the FUNDS' Board determines that service on a board is consistent with the interests of the FUNDS, and the FUNDS' shareholders; (ii) the ICCC determines that service of a board is consistent with the interest of FAF Advisors and its clients; and (iii) both the FUNDS' Board and the ICCC determine that service on a board presents a limited potential for any conflict of interest (at the time of the determination or in the future). In addition, U.S. Bancorp has developed additional limitations on service on a board of directors by employees of FAF Advisors. For additional information see U.S. Bancorp's Code of Ethics or FAF Advisors' Compliance Department.
C. WHEN MAY I DISCLOSE CONFIDENTIAL INFORMATION?
Information about our clients (including former clients) and fund shareholders, for example, their identities, financial circumstances and holdings, is highly confidential. So is information about our securities recommendations, pending transactions for a client or Fund, and Fund portfolio holdings. All of us at FAF Advisors must keep confidential information in strict confidence. Confidential information must not be disclosed to anyone outside FAF Advisors, including family members, except as required to effect securities transactions on behalf of a client or Fund or for other legitimate business purposes. You must observe FAF Advisors' procedures to safeguard the security of any confidential information.
D. MAY I GIVE OR RECEIVE GIFTS?
The Compliance Department shall periodically review such records and provide Department heads with exceptions.
FAF Advisors, as a policy, follows U.S. Bank's policy regarding gifts. As a general rule, you must not solicit, allow yourself to be solicited, or accept gifts, entertainment, or other gratuities intended to or appearing to influence decisions or favors toward FAF Advisors' business to or from any client, potential client, FAF Advisors vendor or potential vendor.
Private Asset Management Employees: As of 01/01/2006, PAM employees will not be subject to the FAF Advisors gift policy. They will, however, still be subject to the U.S. Bank policy regarding gifts.
Non-NASD Registered Employees of FAF Advisors: You may not give and should refrain from accepting individual gifts with a value exceeding $100, even if the gift is not intended to influence your behavior, or to influence another. In isolated circumstances, when a gift is received with a value in excess of $100 and returning the gift would offend the giver, you may accept the gift only if you disgorge an amount equal to the value of the gift (less the $100 amount you are allowed) to a charitable organization of your choice. Such an exception to the Gift Policy will only be allowed upon your receipt of the written consent of the Compliance Department. Contact the Compliance Department for more details on charitable donations.
NASD Registered Employees of FAF Advisors: You may not give or accept individual gifts with a value exceeding $100 from any entity either doing business with FAF Advisors or intending to influence business with FAF Advisors in a calendar year.
You may accept or provide reasonable business meals and entertainment if the client, potential client FAF Advisors vendor or potential vendor is physically present at the business meal or entertainment. In the event that any such business meal, entertainment, or gift has a value exceeding $100 per person you must promptly report the meal or entertainment or gift in the FAF Advisors Gift, Entertainment and MealsTracking database. Compliance will review all reported gifts/entertainment on a quarterly basis and provide Department heads with exceptions to the policy.
A waiver to accept gifts, entertainment or other gratuities, and to attend events that fall outside this gift policy may be granted if a significant benefit would accrue to FAF Advisors. A waiver may be granted by the Compliance Department and should be reported using the FAF Advisors Gift Tracking database.
Every quarter you must certify that you have been in compliance and will continue to comply with the FAF Advisors' and U.S. Bank's policies regarding gifts. The quarterly certification can be completed electronically at the same time you certify your personal securities transactions.
A copy of the Bank's policy is available on the intranet.
E. MAY I MAKE POLITICAL AND CHARITABLE CONTRIBUTIONS?
You must not make political contributions for the purposes of obtaining or retaining advisory contracts with government entities. In soliciting political or charitable donations from various people in the business community, you must never allow the present or anticipated business relationships with FAF Advisors or any of its affiliates to be a factor in soliciting any contributions.
ENFORCEMENT OF THE CODE AND SANCTIONS
While the Code of Ethics will be monitored by the FAF Advisors Compliance group, enforcement of the Code for PAM employees will be done by the Trust Compliance group.
Transaction costs associated with an action and any loss realized on the transaction must be borne by the responsible employee. Gains from an ICCC sanction must be transferred to an account maintained by FAF Advisors, for distribution to charity.
This Code has been adopted by FAF Advisors and is administered by the Compliance Department under the authority of the Internal Compliance Control Committee ("ICCC"). FAF Advisors' Chief Compliance Officer regularly reports on the operation of the Code and any changes he or she believes appropriate. In addition, the Chief Compliance Officer will promptly report any material violations of the Code, the results of any investigation he or she has conducted, and recommend sanctions to the ICCC. The ICCC may delegate the enforcement of immaterial breaches of the Code to the Chief Compliance Officer subject to his or her making a report of those violations and the actions at the next quarterly meeting of the ICCC
In considering actions to enforce the Code, the ICCC will consider all of the relevant facts and circumstances of the incident and the employee's prior record of compliance with the Code. Following its review, the ICCC may impose sanctions as it deems appropriate, including oral reprimand, a letter of censure, a fine, a reduction in salary or position, suspension without pay, termination of personal trading privileges, and/or termination of the employment of the violator. A violator will be obligated to pay any sums due resulting from a violation by a member of his/her immediate family.
The imposition of sanctions under this Code does not preclude the imposition of additional sanctions by the FUNDS' Board of Directors and cannot be deemed a waiver of any rights by any FUND or client. In addition to sanctions that may be imposed, persons who violate this Code may be subject to various penalties and sanctions including, for example, injunctions, treble damages, disgorgement of profits, fines of up to three times the profit gained or loss avoided (whether or not the violator actually benefited), and jail sentences.
REPORTING TO THE BOARD
No less frequently than annually, the Chief Compliance Officer shall submit to the Board of Directors a written report that describes any issues that have arisen under the Code (including procedures implementing the Code) since the last report to the Board of Directors, including, but not limited to, information about any material violations of the Code or procedures and sanctions imposed in response to any material violations. The Chief Compliance Officer shall also certify, in writing to the Board of Directors, that FAF Advisors has adopted procedures reasonably necessary to prevent Access Persons and Restricted Access Persons from violating the Code.
GLOSSARY
A. ACCESS PERSONS means any directors or officer of FAF Advisors, as well as any employee who has access to nonpublic information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any Fund. See also RESTRICTED ACCESS PERSON.
B. ACE means the Active Core Equity Guidance Process that PAM offers to its portfolio managers and that is described in the PAM Active Core Equity Guidance Composite Performance Policy & Procedures (Implemented 1/1/04) by the IPC.
C. BENEFICIAL OWNERSHIP of a Security is to be determined generally in the same manner as it would be under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 ("1934 Act"). This means that persons should generally consider themselves the "Beneficial Owner" of any Security in which they have a direct or indirect financial interest. In addition, persons should consider themselves the "Beneficial Owner" of any Security held by their spouse, minor children, relatives who share their home, or other persons by reason of any contract, arrangement, understanding, or relationship that provides them with sole or shared voting or investment power over that SECURITY.
Although the following list is not exhaustive, under the 1934 Act and this Code, a person generally would be regarded to be the "Beneficial Owner" of the following SECURITIES:
2. SECURITIES held in the person's own name;
3. SECURITIES held with another in joint tenancy, community property, or other joint ownership;
4. SECURITIES held by a bank or broker as nominee or custodian on such person's behalf or pledged as collateral for a loan;
5. SECURITIES held by members of the person's immediate family sharing the same household ("immediate family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships and also includes a registered domestic partner);
6. SECURITIES held by a relative not residing in the person's home if the person is a custodian, guardian or otherwise has or shares control over the purchase, sale, or voting of the SECURITIES;
7. SECURITIES held by a trust in which the person is a beneficiary and has or shares the power to make purchase or sale decisions;
8. SECURITIES held by a trust for which the person serves as a trustee (other than an administrative trustee with no investment discretion);
9. SECURITIES held by a general partnership or limited partnership in which the person is a general partner;
10. SECURITIES owned by a corporation in which the person has a control position or in which the person has or shares investment control over the portfolio Securities (other than a registered investment company);
11. SECURITIES in a portfolio giving the person certain performance-related fees; and
12. SECURITIES held by another person or entity pursuant to any agreement, understanding, relationship or other arrangement giving the person any direct or indirect pecuniary interest.
D. BLACKOUT PERIODS means the time period during which buying or selling a security is prohibited. See Section E under Personal Securities Transactions.
E. CONTROL shall have the meaning as set forth in Section 2(a)(9) of the 1940 Act. For example, "control" means the power to exercise a controlling influence over the management or policies of a company. Beneficial Ownership of more than 25% of the voting securities of a company is presumed to be "control" of that company.
F. EXEMPT SECURITY includes:
1. Direct obligations of the Government of the United States;
2. Bankers' acceptances, bank certificates of deposit, commercial paper;
3. High-quality short-term debt instruments including repurchase agreements;
4. Shares issued by registered open-end investment companies for which FAF Advisors does not serve as investment adviser or subadviser; and
5. Shares of any money market series of the FUNDS.
G. FUNDS means the First American Funds, Inc.
H. IAG means the Institutional Advisory Group of FAF Advisors, which is responsible for the management of separate accounts for instititional clients as well as funds registered with the SEC.
I. INITIAL PUBLIC OFFERING means an offering of Securities registered under the 1933 Act, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act.
J. MATERIAL NON-PUBLIC INFORMATION
Information is "material" if it has "market significance" in the sense that disseminating the information is substantially likely to affect the market price of any outstanding securities, or is substantially likely to be considered important by reasonable investors in deciding whether to trade the securities. Information is not considered "public" unless it has been reported in the news media, revealed by the issuer in a public forum, discussed in a publicly disseminated research report, or otherwise made publicly available.
Examples of potentially "material" information that should be reviewed carefully to determine whether they are material in the context of a particular situation include:
1. Information about any First American Fund's or client account's portfolio holdings, trading strategies, and securities transactions;
2. Earnings information, including new or changed earnings estimates;
3. Mergers, acquisitions, tender offers, joint ventures, or changes in assets;
4. New products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract);
5. Significant corporate developments, such as results of tests regarding safety or effectiveness of products that may impact regulatory approvals (e.g., FDA testing);
6. Changes in control or in management;
7. Auditor resignation, change in auditors, or auditor notification that the issuer may no longer rely on an auditor's audit report;
8. Events regarding the issuer's securities (e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, changes in debt ratings, advanced refundings, public or private sales of additional securities, including Private Investments in Public Entities - "PIPES";
9. Bankruptcies or receiverships;
10. Status of union or other significant contract negotiations;
11. Confidential government information relating to government-issued securities;
12. Major litigation; and
13. Any other significant information that would have an impact on the price of a company's securities.
K. PRIVATE PLACEMENT means an offering that is exempt from registration under the Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) or Section 4(6), or pursuant to rule 504, rule 505 or rule 506 under the 1933 Act.
L. PAM means the Private Asset Management Group of U.S. Bancorp, which, generally, is responsible for the management of client assets for U.S. Bank's Institutional Trust and Custody group as subadviser (PAM may also manage separate accounts for high net worth clients).
M. RESTRICTED ACCESS PERSON means any ACCESS PERSON who is actually involved in making investment recommendations to FAF Advisors clients, participate in the determination of which investment recommendations will be made, or has the power to influence management of the FUNDS, or execute trades for any FUND or client accounts. RESTRICTED ACCESS PERSONS generally include research analysts, traders, portfolio/fund managers, executive management of FAF Advisors, members of the Legal and Compliance Departments, and their executive or departmental assistants.
N. "SECURITY" or "SECURITIES" shall include all the instruments set forth in
Section 2(a)(36) of the 1940 Act, i.e., any note, stock, treasury stock,
security future, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral-trust
certificate, reorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or other
mineral rights, any put, call, straddle, option, or privilege on any
security (including a certificate of deposit) or on any group or index of
securities (including any interest therein or based on the value thereof),
or any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a 'Security' or any certificate of
interest or participation in, temporary or interim certificate for, receipt
for, guarantee of, or warrant or right to subscribe to or purchase, any of
the foregoing. For purposes of this Code, "SECURITY" or "SECURITIES" shall
also include any futures contract, option on a futures contract, forward
agreement, SWAP agreement (including caps, floors, and collars), and any
other derivative instrument. "SECURITY" or "SECURITIES" shall not include
checking and other demand or time deposits maintained at a bank or similar
financial institution.
EXHIBIT 1
ACKNOWLEDGMENT AND AGREEMENT TO COMPLY
By signing this Acknowledgement and Agreement to Comply I certify the following:
- I have also read and understand the Code of Ethics, (the "Code") and have had an opportunity to ask any questions that I may have had concerning the Code.
- I understand that I am responsible for complying with the Code and agree to comply.
- I agree that I will not execute any prohibited transactions or trade without obtaining the necessary pre-clearance.
- I agree that I will not trade on the basis of insider information.
- I agree to comply with FAF Advisors' policies regarding other conflicts of interest, including its Gift Policy.
- I also understand that the Legal and Compliance Departments can assist me with questions I may have concerning the Code. I agree to contact them if I have any questions concerning the Code or the interpretation or application of the Code to a particular situation.
- I understand that my compliance with this Code and all applicable laws is a condition of my employment with FAF Advisors.
- I have reported all material violations of the Code within the scope of my knowledge to the appropriate officer of FAF Advisors.
- I understand that my violation of the Code may subject me to personal civil and criminal liability, regulatory fines and/or suspensions. I also understand that my violation of the Code subject FAF Advisors to civil and criminal liability as well as regulatory discipline.
EXHIBIT 2
CODE OF ETHICS CONTACT LIST
If you think you or any other employee has violated the Code of Ethics, please call:
David Lui, Chief Compliance Officer: : Fax Charles Manzoni, General Counsel, Legal: : Fax Tom Schreier, CEO, FAF Advisors:
Please contact the following people with any questions concerning:
Code of Ethics Policy and Procedures:
Dexter Buck, Director of Compliance, Advisory: Jason Mitchell, Code of Ethics Analyst: : Fax Kevin Roellinger, Code of Ethics Analyst: fafcodeofethics@fafadvisors.com Insider Trading: Jay Aslani, Director of Compliance, Distribution: Portfolio Compliance: Mark Corns, Fixed Income Manager: Wes Blosser, Equity Manager: |
Exhibit 99(p)(3)
CODE OF ETHICS
of
- J.P. Morgan High Yield Partners, LLC
- Pacholder & Company, LLC
- JPMorgan Investment Advisors Inc.
- DVCMM LLC
- J.P. Morgan Alternative Asset Management, Inc.
- JPMorgan Asset Management (London) Ltd.
- JPMorgan Asset Management (UK) Ltd.
- J.P. Morgan Investment Management Inc.
- Security Capital Research & Management Inc.
(collectively, "JPMAM")
Effective February 1, 2005
(REVISED SEPTEMBER 29, 2005)
CODE OF ETHICS
JPMorgan Asset Management
TABLE OF CONTENTS
1. Introduction and Standards........................................... 1
1.1. Adoption of the Code of Ethics................................ 1
1.2. Standards of Business Conduct................................. 1
1.3. General Definitions........................................... 2
2. Reporting Requirements............................................... 3
2.1. Holdings Reports.............................................. 3
2.1.1. Content of Holdings Reports.......................... 4
2.1.2. Timing of Holdings Reports........................... 4
2.2. Transaction Reports........................................... 4
2.2.1. Content of Transaction Reports....................... 4
2.2.2. Timing of Transaction Reports........................ 4
2.3. Consolidated Report........................................... 5
2.4. Exceptions from Reporting Requirements........................ 5
3. Pre-approval of Certain Investments.................................. 5
4. Additional Restrictions and Corrective Action under the Personal
Trading Policy and other related Policies and Procedures............. 5
4.1. Designated Broker Requirement................................. 5
4.2. Blackout Provisions........................................... 5
4.3. Minimum Investment Holding Period and Market Timing
Prohibition................................................... 6
4.4. Trade Reversals and Disciplinary Action....................... 6
5. Books and Records to be Maintained by Investment Advisers............ 6
6. Confidentiality...................................................... 7
7. Conflicts of Interest................................................ 7
7.1. Trading in Securities of Clients.............................. 7
7.2. Trading in Securities of Suppliers............................ 7
7.3. Gifts......................................................... 7
7.4. Entertainment................................................. 7
7.5. Political and Charitable Contributions........................ 8
7.6. Outside Business Activities................................... 8
|
CODE OF ETHICS
JPMorgan Asset Management
1. INTRODUCTION AND STANDARDS
1.1. ADOPTION OF THE CODE OF ETHICS
This Code of Ethics for JPMAM (the "Code") has been adopted by the registered investment advisers named on the cover hereof in accordance with Rule 204A-1 under the Investment Advisers Act of 1940 (the "Advisers Act"). Rule 204A-1 requires, at a minimum, that an adviser's code of ethics set forth standards of conduct, require compliance with federal securities laws and address personal trading by advisory personnel.
While all J.P. Morgan Chase & Co. ("JPMC") staff, including JPMAM Supervised Persons, as defined below, are subject to the personal trading policies under the JPMC Code of Conduct, the JPMAM Code establishes more stringent standards reflecting the fiduciary obligations of JPMAM and its Supervised Persons. Where matters are addressed by both the JPMC Code of Conduct and this Code, Supervised Persons of JPMAM must observe and comply with the stricter standards set forth in this Code.
JPMAM hereby designates the staff of its Compliance Department to act as designees for the respective chief compliance officers of the JPMAM registered investment advisers ("CCO") in administering this Code. Anyone with questions regarding the Code or its application should contact the Compliance Department.
1.2. STANDARDS OF BUSINESS CONDUCT
It is the duty of all Supervised Persons to place the interests of JPMAM clients before their own personal interests at all times and avoid any actual or potential conflict of interest. Given the access that Supervised Persons may have to proprietary and client information, JPMAM and its Supervised Persons must avoid even the appearance of impropriety with respect to personal trading, which must be oriented toward investment rather than short-term or speculative trading. Supervised Persons must also comply with applicable federal securities laws and report any violations of the Code promptly to the Compliance Department, which shall report any such violation promptly to the CCO.
Access Persons, as defined below, must report, and JPMAM must review, their personal securities transactions and holdings periodically. See section 2. Reporting Requirements and the JPMAM Personal Trading Policy, as defined below, for details regarding reporting procedures.
Compliance with the Code, and other applicable policies and procedures, is a condition of employment. The rules, procedures, reporting and recordkeeping requirements contained in the Code are designed to prevent employees from violating the provisions of the Code. Failure by a Supervised Person to comply with the Code may adversely impact JPMAM and may constitute a violation of federal securities laws.
The Compliance Department shall distribute to each Supervised Person a copy of the Code and any amendments, receipt of which shall be acknowledged in writing by the Supervised Person. Written acknowledgements shall be maintained by the Compliance Department in accordance with section 5. Books and Records to be Maintained by Investment Advisers. The form of acknowledgment shall be determined by the Compliance Department.
At least annually, each CCO must review the adequacy of the Code and the policies and the procedures herein referenced.
CODE OF ETHICS
JPMorgan Asset Management
1.3. GENERAL DEFINITIONS
(a) SUPERVISED PERSONS include:
(1) Any partner, officer, director (or other person occupying a similar status or performing similar functions) and employees of JPMAM;
(2) All employees of entities affiliated with JPMAM that have been authorized by the Office of the Corporate Secretary to act in an official capacity on behalf of a legal entity within JPMAM, sometimes referred to as "dual hatted" employees;
(3) Certain consultants as well as any other persons who provide advice on behalf of JPMAM and are subject to JPMAM's supervision and control; and
(4) All Access Persons, as defined in paragraph (b).
(b) ACCESS PERSONS include any partner, officer, director (or other person occupying a similar status or performing similar functions) of JPMAM, as well as any other Supervised Person who:
(1) Has access to nonpublic information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any registered fund advised or sub-advised by JPMAM; or
(2) Is involved in making securities recommendations to clients, including Funds, or who has access to such recommendations that are nonpublic.
(c) ASSOCIATED ACCOUNT refers to an account in the name or for the direct or indirect benefit of a Supervised Person or a Supervised Person's spouse, domestic partner, minor children and any other person for whom the Supervised Person provides significant financial support, as well as to any other account over which the Supervised Person or any of these other persons exercise investment discretion, regardless of beneficial interest. Excluded from Associated Accounts are any 401(k) and deferred compensation plan accounts for which the Supervised Person has no investment discretion.
(d) AUTOMATIC INVESTMENT PLAN means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.
(e) BENEFICIAL OWNERSHIP is interpreted to mean any interest held directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, or any pecuniary interest in equity securities held or shared directly or indirectly, subject to the terms and conditions set forth under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934. A Supervised Person who has questions regarding the definition of this term should consult the Compliance Department. PLEASE NOTE: Any report required under section 2. Reporting Requirements may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security to which the report relates.
(f) CLIENT refers to any entity (e.g., person, corporation or Fund) for which JPMAM provides a service or has a fiduciary responsibility.
CODE OF ETHICS
JPMorgan Asset Management
(g) FEDERAL SECURITIES LAWS means the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940 ("1940 Act"), the Advisers Act, Title V of the Gramm-Leach-Bliley Act (1999), any rules adopted by the Securities and Exchange Commission ("SEC") under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by the SEC or the Department of the Treasury.
(h) FUND means an investment company registered under the 1940 Act.
(i) INITIAL PUBLIC OFFERING means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
(j) JPMAM is an abbreviation for JPMorgan Asset Management, the asset management business of JPMorgan Chase & Co. Within the context of this document, JPMAM refers to the U.S. registered investment advisers of JPMorgan Asset Management identified on the cover of this Code.
(k) LIMITED OFFERING means an offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to Rules 504, 505 or 506 thereunder.
(l) PERSONAL TRADING POLICY refers to the Personal Trading Policy for JPMorgan Asset Management Americas and/or the Personal Investment Policy for JPMAM Employees in EMEA, Asia and Japan, as applicable, and the procedures thereunder.
(m) REPORTABLE SECURITY means a security as defined under section 202(a)(18) of the Advisers Act held for the direct or indirect benefit of an Access Person, including any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing. Also included in this definition are open-end mutual funds (except as noted below) and exchange traded funds. Excluded from this definition are:
(1) Direct obligations of the Government of the United States;
(2) Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements;
(3) Shares issued by money market funds; and
(4) Shares of other types of mutual funds, unless JPMAM acts as the investment adviser, sub-adviser or principal underwriter for the Fund.
2. REPORTING REQUIREMENTS
2.1. HOLDINGS REPORTS
Access Persons must submit to the Compliance Department a report, in the form designated by the Compliance Department, of the Access Person's current securities holdings that meets the following requirements:
CODE OF ETHICS
JPMorgan Asset Management
2.1.1. Content of Holdings Reports
Each holdings report must contain, at a minimum:
(a) The title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Reportable Security in which the Access Person has any direct or indirect beneficial ownership;
(b) The name of any broker, dealer or bank with which the Access Person maintains an Associated Account in which any Reportable Securities are held for the Access Person's direct or indirect benefit, as well as all pertinent Associated Account details (e.g., account title, account number, etc.); and
(c) The date the Access Person submits the report.
2.1.2. Timing of Holdings Reports
Access Persons must each submit a holdings report:
(a) No later than 10 days after the person becomes an Access Person, and the information must be current as of a date no more than 45 days prior to the date the person becomes an Access Person.
(b) At least once each 12-month period thereafter on January 30, and the information must be current as of a date no more than 45 days prior to the date the report was submitted.
2.2. TRANSACTION REPORTS
Access Persons must submit to the Compliance Department quarterly securities transactions reports, in the form designated by the Compliance Department, that meet the following requirements:
2.2.1. Content of Transaction Reports
Each transaction report must contain, at a minimum, the following information about each transaction involving a Reportable Security in which the Access Person had, or as a result of the transaction acquired, any direct or indirect beneficial ownership:
(a) The date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Reportable Security involved;
(b) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(c) The price of the security at which the transaction was effected;
(d) The name of the broker, dealer or bank with or through which the transaction was effected; and
(e) The date the Access Person submits the report.
2.2.2. Timing of Transaction Reports
Each Access Person must submit a transaction report no later than 30 days after the end of each calendar quarter, which report must cover, at a minimum, all transactions during the quarter.
CODE OF ETHICS
JPMorgan Asset Management
2.3. CONSOLIDATED REPORT
At the discretion of the Compliance Department, the form of annual holdings report may be combined with the form of the concurrent quarterly transaction report, provided that such consolidated holdings and transaction report meets, at a minimum, the timing requirements of both such reports if submitted separately.
2.4. EXCEPTIONS FROM REPORTING REQUIREMENTS
An Access Person need not submit:
(a) Any report with respect to securities held in accounts over which the Access Person had no direct or indirect influence or control;
(b) A transaction report with respect to transactions effected pursuant to an automatic investment plan;
(c) A transaction report if the report would duplicate information contained in broker trade confirmations or account statements that the Compliance Department holds in its records so long as the Compliance Department receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter.
3. PRE-APPROVAL OF CERTAIN INVESTMENTS
Access Persons must obtain approval from the Compliance Department before they directly or indirectly acquire beneficial ownership in any security in an initial public offering or in a limited offering. The Personal Trading Policy shall set forth the Compliance pre-clearance procedures as well as any exceptions to the pre-clearance requirement.
4. ADDITIONAL RESTRICTIONS AND CORRECTIVE ACTION UNDER THE PERSONAL TRADING POLICY AND OTHER RELATED POLICIES AND PROCEDURES
In furtherance of the standards for personal trading set forth herein, JPMAM shall maintain a Personal Trading Policy with respect to the trading restrictions and corrective actions discussed under this section 4, and such other restrictions as may be deemed necessary or appropriate by JPMAM.
4.1. DESIGNATED BROKER REQUIREMENT
Any Associated Account, except as otherwise indicated in the Personal Trading Policy, must be maintained with a Designated Broker, as provided under the JPMC Code of Conduct and the Personal Trading Policy.
4.2. BLACKOUT PROVISIONS
The personal trading and investment activities of Supervised Persons are subject to particular scrutiny because of the fiduciary nature of the business. Specifically, JPMAM must avoid even the appearance that its Supervised Persons conduct personal transactions in a manner that conflicts with the firm's investment activities on behalf of clients. Towards this end, Supervised Persons may be restricted from conducting personal investment transactions during certain periods ("Blackout Periods"), and may be instructed to reverse previously completed personal investment transactions (see section 4.4). Additionally, the Compliance Department may restrict the personal trading activity of any Supervised Person if such activity has the appearance of violating the intent of the blackout provision or is deemed to present a possible conflict of interest.
CODE OF ETHICS
JPMorgan Asset Management
The Blackout Periods set forth in the Personal Trading Policy may reflect varying levels of restriction appropriate for different categories of Supervised Persons based upon their level of access to nonpublic client or proprietary information.
4.3. MINIMUM INVESTMENT HOLDING PERIOD AND MARKET TIMING PROHIBITION
Supervised Persons are subject to a minimum holding period, as set forth under the Personal Trading Policy, for all transactions in Reportable Securities, as defined under section 1.3.
Supervised Persons are not permitted to conduct transactions for the purpose of market timing in any Reportable Security. Market timing is defined as an investment strategy using frequent purchases, redemptions, and/or exchanges in an attempt to profit from short-term market movements.
Please see the Personal Trading Policy for further details on transactions covered or exempted from the minimum investment holding period.
4.4. TRADE REVERSALS AND DISCIPLINARY ACTION
Transactions by Supervised Persons are subject to reversal due to a conflict (or appearance of a conflict) with the firm's fiduciary responsibility or a violation of the Code or the Personal Trading Policy. Such a reversal may be required even for a pre-cleared transaction that results in an inadvertent conflict or a breach of black out period requirements under the Personal Trading Policy.
Disciplinary actions resulting from a violation of the Code will be administered in accordance with related JPMAM policies governing disciplinary action and escalation. All violations and disciplinary actions will be reported promptly by the Compliance Department to the JPMAM CCO. Violations will be reported at least quarterly to the firm's executive committee and, where applicable, to the directors or trustees of an affected Fund.
Violations by Supervised Persons of any laws that relate to JPMAM's operation of its business or any failure to cooperate with an internal investigation may result in disciplinary action up to and including immediate dismissal and, if applicable, termination of registration.
5. BOOKS AND RECORDS TO BE MAINTAINED BY INVESTMENT ADVISERS
(a) A copy of this Code and any other code of ethics adopted by JPMAM pursuant to Rule 204A-1 that has been in effect during the past five years;
(b) A record of any violation of the Code, and any action taken as a result of that violation;
(c) A record of all written acknowledgments for each person who is currently, or within the past five years was, a Supervised Person of JPMAM;
(d) A record of each report made by an Access Person as required under section 2. Reporting Requirements;
(e) A record of the names of persons who are currently, or within the past five years were, Access Persons;
(f) A record of any decision, and the reasons supporting the decision, to
approve the acquisition of securities by Access Persons under section
3. Pre-approval of Certain Investments, for at least five years after
the end of the fiscal year in which the approval is granted; and
(g) Any other such record as may be required under the Code or the Personal Trading Policy.
CODE OF ETHICS
JPMorgan Asset Management
6. CONFIDENTIALITY
Supervised Persons have a special responsibility to protect the confidentiality of information related to customers. This responsibility may be imposed by law, may arise out of agreements with customers, or may be based on policies or practices adopted by the firm. Certain jurisdictions have regulations relating specifically to the privacy of individuals and/or business and institutional customers. Various business units and geographic areas within JPMC have internal policies regarding customer privacy.
The foregoing notwithstanding, JPMAM and its Supervised Persons must comply with all provisions under the Bank Secrecy Act, the USA Patriot Act and all other applicable federal securities laws, as well as applicable anti-money laundering and know your client policies and procedures of JPMAM and JPMC.
7. CONFLICTS OF INTEREST
With regards to each of the following restrictions, more detailed guidelines may be found under the applicable JPMAM policy and/or the JPMC Code of Conduct.
7.1. TRADING IN SECURITIES OF CLIENTS
Supervised Persons should not invest in any securities of a client with which the Supervised Person has or recently had significant dealings or responsibility on behalf of JPMAM if such investment could be perceived as based on confidential information.
7.2. TRADING IN SECURITIES OF SUPPLIERS
Supervised Persons in possession of information regarding, or directly involved in negotiating, a contract material to a supplier of JPMAM may not invest in the securities of such supplier. If you own the securities of a company with which we are dealing and you are asked to represent JPMorgan Chase in such dealings you must:
(a) Disclose this fact to your department head and the Compliance Department; and
(b) Obtain prior approval from the Compliance Department before selling such securities.
7.3. GIFTS
A conflict of interest occurs when the personal interests of Supervised Persons interfere or could potentially interfere with their responsibilities to the firm and its clients. Supervised Persons should not accept inappropriate gifts, favors, entertainment, special accommodations, or other things of material value that could influence their decision-making or make them feel beholden to a person or firm. Similarly, Supervised Persons should not offer gifts, favors, entertainment or other things of value that could be viewed as overly generous or aimed at influencing decision-making or making a client feel beholden to the firm or the Supervised Person. More specific guidelines are set forth under the gifts and entertainment policy of JPMAM and under the JPMC Code of Conduct.
7.4. ENTERTAINMENT
No Supervised Person may provide or accept extravagant or excessive entertainment to or from a client, prospective client, or any person or entity that does or seeks to do business with or on behalf of JPMAM. Supervised Persons may provide or accept a business entertainment event, such as dinner or a sporting event, of reasonable value, if the person or entity providing the entertainment is present, and only to the extent that such entertainment is permissible under both the gifts and entertainment policy of JPMAM and the JPMC Code of Conduct
CODE OF ETHICS
JPMorgan Asset Management
7.5. POLITICAL AND CHARITABLE CONTRIBUTIONS
Supervised Persons are prohibited from making political contributions for the purpose of obtaining or retaining advisory contracts with government entities. In addition, Supervised Persons are prohibited from considering JPMAM's current or anticipated business relationships as a factor in soliciting political or charitable donations. Additional restrictions, disclosures and other requirements regarding political activities are described under the JPMC Code of Conduct.
7.6. OUTSIDE BUSINESS ACTIVITIES
A Supervised Person's outside activities must not reflect adversely on the firm or give rise to a real or apparent conflict of interest with the Supervised Person's duties to the firm or its clients. Supervised Persons must be alert to potential conflicts of interest and be aware that they may be asked to discontinue any outside activity if a potential conflict arises. Supervised Persons may not, directly or indirectly:
(a) Accept a business opportunity from someone doing business or seeking to do business with JPMAM that is made available to the Supervised Person because of the individual's position with the firm.
(b) Take for oneself a business opportunity belonging to the firm.
(c) Engage in a business opportunity that competes with any of the firm's businesses.
More specific guidelines are set forth under the conflicts of interest policy of JPMAM and under the JPMC Code of Conduct. Procedures and forms for pre-clearance of these activities by the Office of the Secretary of JPMC are available in the JPMC Procedures for Pre-Clearance of Outside Activities Referenced in the JPMC Code of Conduct. Supervised Persons must seek a new clearance for a previously approved activity whenever there is any material change in relevant circumstances, whether arising from a change in your job or association with JPMAM or in your role with respect to that activity or organization. You must also notify the Office of the Secretary of JPMC when any approved outside activity terminates.
Regardless of whether an activity is specifically addressed under JPMAM policies or the JPMC Code of Conduct, supervised persons should disclose any personal interest that might present a conflict of interest or harm the reputation of the firm.
Exhibit 99(q)
FIRST AMERICAN FUNDS, INC.
FIRST AMERICAN INVESTMENT FUNDS, INC.
FIRST AMERICAN STRATEGY FUNDS, INC.
MOUNT VERNON SECURITIES LENDING TRUST
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned persons hereby constitute and appoint Thomas S. Schreier, Mark S. Jordahl, James D. Alt, Kathleen L. Prudhomme, Charles R. Manzoni, Brett L. Agnew, Richard J. Ertel, and Jeffery M. Wilson, and each of them, his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and re-substitution, 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-1A of the above-referenced investment companies, 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
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/s/ Benjamin R. Field, III Director June 20, 2006
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Benjamin R. Field, III
/s/ Roger A. Gibson Director June 20, 2006
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Roger A. Gibson
/s/ Leonard W. Kesrowski Director June 20, 2006
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Leonard W. Kedrowski
/s/ Richard K. Riederer Director June 20, 2006
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Richard K. Riederer
/s/ Victoria J. Herget Director June 20, 2006
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Victoria J. Herget
/s/ Joseph D. Strauss Director June 20, 2006
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Joseph D. Strauss
/s/ Virginia L. Stringer Chair June 20, 2006
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Virginia L. Stringer
/s/ James M. Wade Director June 20, 2006
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James M. Wade
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