FAF ADVISORS, INC. RICHARD J. ERTEL
800 Nicollet Mall COUNSEL
BC-MN-HO5F
Minneapolis, MN 55402 Direct line: (612) 303-7987
Fax: (612) 303-4223
November 18, 2008
VIA EDGAR
Ms. Kimberly Browning
Office of Disclosure and Review
Division of Investment Management
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: First American Investment Funds, Inc.
SEC File No. 333-154172
Response to Staff Comments related to Registration Statement on Form N-14
filed with the Securities and Exchange Commission ("SEC") on October 10,
2008
Dear Ms. Browning:
The purpose of this letter is to respond to the disclosure comments that you
transmitted by telephone on November 13, 2008, regarding the above-referenced
N-14 registration statement filing for First American Investment Funds, Inc.
("FAIF") related to the mergers of California Intermediate Tax Free Fund into
California Tax Free Fund and Colorado Intermediate Tax Free Fund into Colorado
Tax Free Fund (each individually, a "Fund," collectively, the "Funds").
Following is our response to your comments, which appear in bold-face type
below.
COMMENTS
1. INCLUDE THE 1933 ACT FILE NUMBER ASSIGNED TO THIS REGISTRATION STATEMENT ON
THE FORM N-14 COVER PAGE OF ANY AMENDMENTS TO THIS FILING.
The 1933 Act file number assigned to the above-referenced filing will be
included on the Form N-14 cover page of any amendment, as requested.
2. PLEASE CONFIRM IN YOUR RESPONSE THAT ALL MATERIAL DIFFERENCES IN INVESTMENT
STRATEGY BETWEEN THE ACQUIRED AND ACQUIRING FUNDS HAVE BEEN DISCLOSED IN
THE PROSPECTUS/PROXY STATEMENT.
We confirm that all material differences in the Funds' investment
strategies have been disclosed in the Prospectus/Proxy Statement.
3. IN THE Q&A AND IN OTHER DISCUSSIONS OF THE COMPARATIVE RISKS OF THE FUNDS
CONTAINED IN THE FILING, CLEARLY EXPLAIN THE INCREASED INTEREST RATE
SENSITIVITY AND ANY OTHER RISKS
ASSOCIATED WITH LONGER-MATURITY BONDS. AS PART OF THIS DISCLOSURE, DESCRIBE
GENERALLY HOW THE VALUE OF A BOND IS INVERSELY RELATED TO INTEREST RATE
CHANGES.
We believe the following series of changes address this comment.
In the President's letter to shareholders at the front of Part A, we have
modified the last sentence of the second paragraph to read as follows (as
indicated):
Thus, you are being asked to vote on a proposal to combine your
Acquired Fund into an Acquiring Fund which has a portfolio with a
longer weighted average maturity and may be, therefore, more sensitive
to interest rate changes than a portfolio with a shorter weighted
average maturity.
In the "Important Shareholder Information" question and answer section that
follows the President's letter (the "Q&A"), the second to last sentence of
the response to the question "How do the Funds' investment objectives,
principal investment strategies and risks compare?" has been modified to
read as follows (as indicated):
The Acquired Funds and Acquiring Funds are generally subject to the
same risks except that the longer-term securities in which the
Acquiring Funds invest are generally more sensitive to interest rate
risk, which means that during periods of rising interest rates the
values of these securities may be more likely to fall than are the
values of shorter-term securities.
The same change has been made to the identical language found in the second
to last sentence of the third paragraph under "Summary - The Proposed
Reorganizations" in the Prospectus/Proxy Statement.
Under "Principal Risk Factors - Interest Rate Risk" in the Prospectus/Proxy
Statement, the language has been modified to read as follows (as
indicated):
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, usually making them more volatile than
securities with shorter maturities. Thus, because the Acquiring Funds
attempt to maintain the weighted average maturity of their portfolio
securities at 10 to 25 years under normal market conditions, whereas
the Acquired Funds attempt to maintain the weighted average maturity
of their portfolio securities at 3 to 10 years under normal market
conditions, the Acquiring Funds are generally subject to greater
interest rate risk. 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.
4. WHEREVER YOU DESCRIBE THE FUNDS' POLICY TO INVEST "AT LEAST 80% OF ITS NET
ASSETS" IN MUNICIPAL SECURITIES EXEMPT FROM FEDERAL AND STATE TAX, FURTHER
DESCRIBE HOW ALTERNATIVE MINIMUM TAX IS TREATED IN RELATION TO THIS POLICY.
2
The following sentence, which appears in the second paragraph of the
President's letter, the Q&A, and under "Summary - The Proposed
Reorganizations" in the Prospectus/Proxy Statement, has been modified (as
indicated) to address this comment.
The Acquired Funds and the Acquiring Funds attempt to meet their
objectives by investing at least 80% of net assets in municipal
securities that pay interest exempt from federal income tax and income
tax of the applicable state, including federal and state alternative
minimum tax.
5. IN THE INVESTMENT STRATEGY COMPARISON IN THE PROSPECTUS/PROXY STATEMENT,
PLEASE IDENTIFY THE RATINGS AGENCIES THAT PROVIDE RATINGS ON SECURITIES
HELD BY THE FUNDS AND THE LOWEST RATING CATEGORY IN WHICH THE FUNDS INVEST.
IF A FUND IS ALLOWED TO INVEST IN DEFAULTED SECURITIES, PLEASE STATE SO.
We have modified the following paragraph found under "Comparison of Fund
Investment Objectives and Investment Strategies" in the Prospectus/Proxy
Statement (as indicated):
Each Acquired Fund and each Acquiring Fund invests mainly in
securities that, at the time of purchase, are either rated investment
grade by Moody's, Standard & Poor's, and/or Fitch, or are unrated and
determined to be of comparable quality by the Advisor. However, each
Acquired Fund and each Acquiring Fund may invest up to 20% 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"), provided the securities are rated at least "B," or are
unrated and determined to be of comparable quality by the Advisor, at
the time of investment. If the rating of a security is reduced or
discontinued after purchase, the impacted Fund is not required to sell
the security, but may consider doing so.
The Funds are not allowed to invest in securities in default.
6. IN THE STRATEGY SECTION OF THE PROSPECTUS/PROXY STATEMENT, DESCRIBE WHETHER
THE FUNDS MAY INVEST IN FIXED-, VARIABLE-, AND/OR RESET-RATE SECURITIES.
The third paragraph under "Comparison of Fund Investment Objectives and
Investment Strategies - Investment Strategies" has been modified as
follows:
Each Acquired Fund and each Acquiring Fund may invest in "general
obligation" bonds, "revenue" bonds, participation interests in
municipal leases, and zero coupon municipal securities. These
securities may have fixed or variable rates of interest, including
rates that reset on a periodic basis.
7. IN THE THIRD PARAGRAPH OF THE PRESIDENT'S LETTER, THE BOARD'S RATIONALE FOR
THE MERGER IS DESCRIBED. PLEASE REVIEW THIS DISCUSSION AND MORE FULLY
DESCRIBE THE REASONING FOR THE BOARD'S RECOMMENDATION THAT SHAREHOLDERS OF
THE ACQUIRED FUNDS APPROVE THE REORGANIZATION.
3
The language in the President's letter describing the board's
recommendation has been modified, as indicated below. (A more complete
discussion of the board's recommendation appears in the Prospectus/Proxy
Statement.)
FAF Advisors, Inc. (the "Advisor") serves as the investment
advisor to the Funds. Upon recommendation of the Advisor and after
review of the Funds, the board of directors of FAIF concluded that it
is appropriate to combine each Acquired Fund into its corresponding
Acquiring Fund. The Acquired Funds and the Acquiring Funds are all
fairly small, and combining the Funds will result in larger funds
which potentially can be more efficiently managed. Combining the Funds
will also reduce duplicative expenses (i.e., audit fees, annual and
semi-annual reports, blue sky fees, etc.). In addition, the Acquiring
Funds have had comparable or better performance than the Acquired
Funds for the three- and five-year periods ended June 30, 2008 and
each Acquiring Fund has lower total expenses than its corresponding
Acquired Fund, after fee waivers and expense reimbursements by the
Advisor. Finally, although each of the Acquired Funds is somewhat
larger than the corresponding Acquiring Funds, the Acquiring Funds are
part of larger mutual fund categories which historically have had
larger asset flows. Thus, the Advisor and the board of directors
believe that the longer-maturity Acquiring Funds have more potential
for asset growth.
8. STATE IN THE PROSPECTUS/PROXY STATEMENT WHETHER THE FUNDAMENTAL AND
NON-FUNDAMENTAL INVESTMENT POLICIES ARE THE SAME OR DIFFERENT BETWEEN THE
ACQUIRING AND ACQUIRED FUNDS.
The heading entitled "Additional Investment Strategies" under the section
entitled "Summary" has been changed to read "Additional Investment
Strategies and Policies" and the following has been added to this section:
Fundamental and Non-Fundamental Investment Restrictions. Each of
the Funds is subject to the same fundamental and non-fundamental
investment restrictions, as set forth in the Funds' SAI. Fundamental
investment restrictions 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. Non-fundamental
investment restrictions may be changed by the Board without a
shareholder vote.
9. IN THE Q&A, IN THE QUESTION THAT READS "WILL EACH FUND'S EXPENSES REMAIN
THE SAME?," THE SECOND SENTENCE READS, "PRIMARILY BECAUSE THEY ARE SMALLER
IN SIZE, THE TOTAL EXPENSES OF THE ACQUIRING FUNDS, BEFORE EXPENSE WAIVERS,
ARE HIGHER THAN THOSE OF THE ACQUIRED FUNDS." ARE THERE OTHER FACTORS THAT
ACCOUNT FOR THE HIGHER EXPENSES OF THE ACQUIRING FUNDS? PLEASE CLARIFY.
The total expenses of the Acquiring Funds, before expense waivers, are
higher than those of the Acquired Funds solely due to their smaller size.
Accordingly, the language referenced above has been clarified by deleting
"primarily."
10. WHAT WILL HAPPEN IF THE MERGER PROPOSALS FAIL TO RECEIVE SHAREHOLDER
APPROVAL? MAKE SURE THAT THIS IS ADDRESSED IN THE PROSPECTUS/PROXY
STATEMENT.
4
In the Prospectus/Proxy Statement, in the sixth paragraph under "Voting
Information - Voting Rights and Required Vote," it reads, "[i]f
shareholders of an Acquired Fund do not vote to approve the applicable
Reorganization, the Directors will consider other possible courses of
action in the best interests of shareholders."
11. UNDER "COMPARISON OF FUND EXPENSES," IN THE THIRD PARAGRAPH, STATE THAT
SUBSEQUENT PURCHASES COMPLETED AFTER THE REORGANIZATION MAY BE SUBJECT TO A
SALES CHARGE.
To address this comment, we have replaced the third paragraph under
"Comparison of Fund Expenses" as reflected here and in Appendix A to this
correspondence (which is a revised version of the "Comparison of Fund
Expenses" section, reflecting changes made in response to Comments 11
through 15):
As shown in the tables below, the maximum sales charge imposed on
purchases of Class A shares for each Acquired Fund are lower than that
of Acquiring Fund and Unaudited Pro Forma Combined Fund maximum sales
charges. While Class A shareholders will not pay a sales charge in
connection with the Reorganizations, they may be subject to the higher
sales charge on purchases of Acquiring Fund Class A shares occurring
after the Reorganizations.
12. FOR EASE OF COMPARISON BY SHAREHOLDERS, WE SUGGEST THAT YOU SPLIT OUT THE
FEE AND EXPENSE TABLES, AS WELL AS THE EXPENSE EXAMPLES, BY SHARE CLASS.
We have modified the "Comparison of Fund Expenses" section, including
changes to the format of the tables therein, as reflected in Appendix A to
this correspondence.
13. PLEASE EXPLAIN IN THE PROSPECTUS/PROXY STATEMENT WHY PRO FORMA "OTHER
EXPENSES" ARE LOWER THAN "OTHER EXPENSES" OF THE ACQUIRING FUND FOR BOTH
THE CALIFORNIA AND COLORADO FUNDS. ALSO EXPLAIN WHY PRO FORMA "OTHER
EXPENSES" FOR CLASS A SHARES OF THE ACQUIRING COLORADO FUND ARE 2 BASIS
POINTS HIGHER THAN THE ACQUIRED COLORADO FUND.
The following language explaining "other expenses" for the California funds
has been added as footnote 2 to the operating expense tables, as reflected
here and in Appendix A to this correspondence (the same footnote has been
added to the Colorado funds' tables):
(2) Other Expenses include administration, audit, legal, blue sky,
directors, insurance, printing, custody and transfer agent fees. As
Fund assets increase, Other Expenses typically decrease as a
percentage of the Fund's average net assets because certain expenses
(e.g., transfer agent fees) are charged as a fixed dollar amount on a
per account or per fund basis. In addition to benefiting from an
increase in assets and corresponding decrease in Other Expenses as a
result of the Reorganization, California Tax Free Fund is expected to
realize a further reduction in Other Expenses due to the reduction in
certain duplicative expenses (e.g., audit fees, annual and semi-annual
shareholder reports, and blue sky fees).
14. DESCRIBE ANY FEE WAIVER OR REIMBURSEMENT ARRANGEMENTS IN A FOOTNOTE TO THE
OPERATING EXPENSE TABLES UNDER "COMPARISON OF FUND EXPENSES" IN THE
PROSPECTUS/PROXY STATEMENT.
5
This has been completed. See footnotes 1 and 5 to the operating expense
tables, included in Appendix A to this correspondence.
15. IN THE EXPENSE EXAMPLES UNDER "COMPARISON OF FUND EXPENSES," EXPLAIN THAT
ANY CONTRACTUAL WAIVERS OR REIMBURSEMENTS ARE ONLY REFLECTED IN THE FIRST
YEAR OF EACH PERIOD AND THAT IT IS ASSUMED THAT THE WAIVER WILL NOT BE IN
EFFECT IN SUBSEQUENT YEARS OF EACH PERIOD.
This has been completed. The following has been added to the lead-in
paragraph to the expense tables:
The fee waivers shown in the Annual Fund Operating Expense tables
above are only reflected in the first year of each of the following
time periods.
16. IN THE SUMMARY OF THE FUNDS' INVESTMENT STRATEGIES IN THE PROSPECTUS/PROXY
STATEMENT, IT READS THAT THE FUNDS MAY UTILIZE FUTURES AND OPTIONS ON
FUTURES "IN AN ATTEMPT TO MANAGE THE EFFECTIVE MATURITY OF SECURITIES IN
THE FUND'S PORTFOLIO." PLEASE CLARIFY IN THIS SECTION OF THE
PROSPECTUS/PROXY STATEMENT WHAT IS MEANT BY "ATTEMPT TO MANAGE" AND WHETHER
THE FUNDS CAN INVEST IN FUTURES FOR HEDGING AND/OR SPECULATIVE PURPOSES.
The relevant sentence has been modified to clarify that the Funds enter
into futures contracts as a principal investment strategy for hedging
purposes only, as follows:
Each Acquired Fund and each Acquiring Fund may utilize future
contracts and options on futures contracts to hedge against market
risk, credit risk and yield curve risk, and to manage the effective
maturity or duration of each Fund's portfolio.
17. IN THE DISCUSSION OF FUND STRATEGIES, PLEASE CLEARLY IDENTIFY WHICH
POLICIES OR STRATEGIES ARE PRINCIPAL AND WHICH ARE NON-PRINCIPAL.
We have added "Principal" to the "Investment Strategies" heading under
"Comparison of Fund Investment Objectives and Investment Strategies." We
also note that the introductory paragraphs to this section consistently and
accurately describe the strategies to be discussed in this section as being
"principal" strategies.
18. DESCRIBE THE RISKS SPECIFIC TO THE PARTICULAR STATE IN WHICH THE FUNDS
INVEST.
We have modified the section entitled "Political and Economic Risks" in the
Prospectus/Proxy Statement to further describe the risks of investing in
securities of the particular State in which it primarily invests.
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
6
of issuers (for example, legislation or court decisions reducing state
aid to local governments or mandating additional services). Because
each 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.
Because the California Intermediate Tax Free Fund and California Tax
Free Fund invest in securities of issuers within the state of
California, these Funds are particularly susceptible to events in
California. Although California has a larger and more diverse economy
than most other states, its economy continues to be driven by, among
other industries, agriculture, tourism, housing and construction, high
technology and manufacturing. A downturn in any one industry may have
a disproportionate impact on California municipal securities.
Similarly, because Colorado Intermediate Tax Free Fund and Colorado
Tax Free Fund invest in securities of issuers within the state of
Colorado, these Funds are particularly susceptible to events in
Colorado. The Colorado economy is based on information, professional
and technical services, communications, transportation, tourism,
natural resources and mining, and manufacturing. Certain obligations
of Colorado state and local public entities are subject to particular
economic risks, including, but not limited to, the vulnerabilities of
resort economies which depend on seasonal tourism, the possibility of
downturns in sales tax and other revenues, and fluctuations in the
real estate market. Because the Acquiring Funds generally invest in
debt securities with longer maturities than the Acquired Funds, the
Acquiring Funds may be more sensitive to interest rate changes. More
detailed information about the risks of investing in California and
Colorado is contained in the Funds' SAI.
19. ADD DISCLOSURE RELATED TO "EXTENSION RISK" TO THE DISCLOSURE FOR THE FUNDS.
The following disclosure has been added under "Principal Risk Factors" in
the Prospectus/Proxy Statement:
EXTENSION RISK. Some municipal bond issuers may have the right to pay
principal on an obligation later than scheduled, which would cause
cash flows to be returned later than expected. This typically results
when interest rates have increased and, as a result of the delay in
cash flows, a Fund would suffer from the inability to invest in higher
yielding securities.
20. IN REFERENCE TO THE SCHEDULE OF INVESTMENTS ("SOI") INCLUDED IN THE
FINANCIAL STATEMENTS CONTAINED IN PART B OF THE N-14, DESCRIBE THE QUANTITY
AND NATURE OF THE SECURITIES THAT WILL NEED TO BE SOLD, INCLUDING
IDENTIFICATION OF ANY SUCH SECURITIES IN THE SOI, IN ORDER FOR THE
ACQUIRING FUNDS TO MAINTAIN COMPLIANCE WITH THEIR RESPECTIVE OBJECTIVES,
STRATEGIES, AND/OR RESTRICTIONS ON ELIGIBLE INVESTMENTS. DESCRIBE FURTHER
WHETHER THE SECURITIES WILL BE SOLD PRIOR TO, OR AFTER, THE REORGANIZATION
AND STATE THE EXPECTED FINANCIAL IMPACT OF SUCH TRANSACTIONS ON THE FUNDS
AND SHAREHOLDERS.
7
As of the date of this correspondence, the Advisor has not identified any
particular portfolio securities in either of the acquired funds that cannot
be held in the respective acquiring fund and would therefore need to be
sold. At the time of the reorganizations, or immediately thereafter, the
Advisor may adjustments to the Funds' holdings in order to adjust weighted
average maturities to then-existing market conditions. The following
disclosure, included under "Summary - Operations of the Acquiring Funds
Before and After the Reorganizations," explains the possible pre- and
post-reorganization portfolio changes and potential impacts on the Funds
and its shareholders.
Based on its review of each Fund's investment portfolio, the Advisor
believes that all of the assets held by each Acquired Fund will be consistent
with the corresponding Acquiring Fund's investment objective and policies and
thus can be transferred to and held by that Acquiring Fund if the Reorganization
Plan is approved for that Fund. If prior to the time of the Reorganizations,
either Acquired Fund were to hold any assets that the corresponding Acquiring
Fund were not allowed to hold, those assets would be sold prior to the
Reorganizations. The proceeds of those sales would be held in temporary
investments or reinvested in assets that the corresponding Acquiring Fund may
hold. The possible need for an Acquired Fund to dispose of assets prior to the
Reorganizations could result in selling securities at a disadvantageous time and
could result in an Acquired Fund's realizing losses that would not otherwise
have been realized. Alternatively, these sales could result in an Acquired
Fund's realizing gains that would not otherwise have been realized, the net
proceeds of which would be included in a distribution to its shareholders prior
to the Reorganizations.
After the Reorganizations, and in response to prevailing market conditions
at such time, it is possible that the Acquiring Funds will make changes in
portfolio holdings in an effort to adjust the weighted average maturities of
their respective portfolios or to respond to other market conditions. This may
result in increased trading of securities, which may produce capital gains
taxable to shareholders upon distribution and may result in increased trading
costs for the Funds.
In connection with the receipt of the foregoing comments from the staff of the
SEC with respect to the above-referenced filing, FAIF hereby acknowledges that:
1. FAIF is responsible for the adequacy and accuracy of the disclosure in the
filing.
2. Staff comments or changes to disclosure in response to staff comments in
the filing reviewed by the staff do not foreclose the Commission from
taking any action with respect to the filing.
3. FAIF may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the
United States.
If you have any questions or comments regarding any of our responses, please
contact me at your earliest convenience at 612-303-7987. Thank you for your help
with this filing.
Sincerely,
/s/ Richard J. Ertel
Richard J. Ertel
Assistant Secretary
First American Investment Funds, Inc.
8
APPENDIX A
COMPARISON OF FUND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of a Fund.
Shareholder fees are paid directly when you buy or sell shares. You pay annual
fund operating expenses indirectly since they are deducted from Fund assets.
The following tables allow you to compare the shareholder fees and annual
fund operating expenses that you may pay for buying and holding Class A and
Class Y shares of each Acquired Fund and the corresponding Acquiring Fund. The
"Unaudited Pro Forma Combined Fund" column in each table below shows you what
the fees and expenses are estimated to be assuming the Reorganizations are
approved. Fee and expense information for Class C shares, which are only offered
by the Acquiring Funds, is also presented.
As shown in the tables below, the maximum sales charge imposed on purchases
of Class A shares for each Acquired Fund are lower than that of Acquiring Fund
and Unaudited Pro Forma Combined Fund maximum sales charges. While Class A
shareholders will not pay a sales charge in connection with the Reorganizations,
they may be subject to the higher sales charge on purchases of Acquiring Fund
Class A shares occurring after the Reorganizations.
The tables below also compare the annual fund operating expenses as a
percentage of average daily net assets for each Fund for the fiscal year ended
June 30, 2008, and pro forma expenses, based on the annual fund operating
expenses for the Acquiring Fund's shares.
CALIFORNIA INTERMEDIATE TAX FREE FUND, CALIFORNIA TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED CALIFORNIA TAX FREE FUND
SHAREHOLDER FEES(1) (fees paid directly from your investment)
MAXIMUM DEFERRED SALES CHARGE
MAXIMUM SALES CHARGE (LOAD) (LOAD) (as a % of original
IMPOSED ON PURCHASES purchase price or redemption
(as a % of offering price) proceeds, whichever is less)
------------------------------ ------------------------------
CLASS A(2) CLASS C CLASS Y CLASS A(3) CLASS C CLASS Y
---------- ------- ------- ---------- ------- -------
California Intermediate Tax Free Fund 2.25% N/A None 0.00% N/A None
California Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
Unaudited Pro Forma Combined California Tax
Free Fund 4.25% 0.00% None 0.00% 1.00% None
(1) An annual low balance fee of $15 may be charged to any account holding a
balance that is less than the account balance minimum of $500 for any
reason, including market fluctuation. See "Policies and Services -
Purchasing, Redeeming, and Exchanging Shares - Additional Information on
Purchasing, Redeeming, and Exchanging Shares - Accounts with Low Balances"
in the Funds' prospectuses.
A-1
(2) Certain investors may qualify for reduced sales charges. Generally, Class A
share investments will qualify for a reduced sales charge if the amount of
the purchase is from $50,000 to $999,999, and the sales charge will be
eliminated if the purchase is $1 million or more.
(3) Class A share 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 if
they are sold within 18 months of purchase.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (as
a % of average net assets)
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS A Fees Fees(1) Expenses(2) Expenses(3) Expenses(4) Waivers(1,5) Expenses(1,5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate Tax
Free Fund 0.50% 0.25% 0.52% 0.00% 1.27% (0.57)% 0.70%
California Tax Free Fund 0.50% 0.25% 0.71% 0.01% 1.47% (0.81)% 0.66%
Unaudited Pro Forma Combined
California Tax Free Fund 0.50% 0.25% 0.48% 0.00% 1.23% (0.58)% 0.65%
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS C Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate Tax
Free Fund N/A N/A N/A N/A N/A N/A N/A
California Tax Free Fund 0.50% 0.65% 0.70% 0.01% 1.86% (0.70)% 1.16%
Unaudited Pro Forma Combined
California Tax Free Fund 0.50% 0.65% 0.54% 0.00% 1.69% (0.54)% 1.15%
A-2
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS Y Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate Tax
Free Fund 0.50% None 0.52% 0.00% 1.02% (0.32)% 0.70%
California Tax Free Fund 0.50% None 0.70% 0.01% 1.21% (0.70)% 0.51%
Unaudited Pro Forma Combined
California Tax Free Fund 0.50% None 0.42% 0.00% 0.92% (0.42)% 0.50%
(1) The Fund's distributor, Quasar Distributors, LLC, has contractually agreed
to limit its Class A 12b-1 fees for California Intermediate Tax Free Fund
to 0.15% through October 31, 2009. The Advisor has contractually agreed, in
addition to other fee waivers and reimbursements, to reimburse an amount of
Class A share 12b-1 fees equal to 0.15% and 0.10% of average daily net
assets for California Intermediate Tax Free Fund and California Tax Free
Fund, respectively, through October 31, 2009.
(2) Other Expenses include administration, audit, legal, blue sky, directors,
insurance, printing, custody and transfer agent fees. As Fund assets
increase, Other Expenses typically decrease as a percentage of the Fund's
average net assets because certain expenses (e.g., transfer agent fees) are
charged on a fixed dollar amount per account or per fund basis. In addition
to benefiting from an increase in assets and corresponding decrease in
Other Expenses as a result of the Reorganization, California Tax Free Fund
is expected to realize a further reduction in Other Expenses due to the
reduction in certain duplicative expenses (e.g., audit fees, annual and
semi-annual shareholder reports, and blue sky fees).
(3) In addition to the Funds' total annual operating expenses that the Funds
bear directly, the Funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the Funds invest.
(4) Total Annual Fund 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 Funds' most recent annual report and
financial highlights reflect the operating expenses of the Funds and do not
include Acquired Fund Fees and Expenses.
(5) The Advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after any waivers by the Advisor and the distributor and
excluding Acquired Fund Fees and Expenses, do not exceed 0.70% for both
Class A and Class Y shares of California Intermediate Tax Free Fund and
0.65%, 1.15%, and 0.50% for Class A, Class C and Class Y shares of
California Tax Free Fund, respectively. These fee waivers and expense
reimbursements may be terminated at any time after October 31, 2009, at the
discretion of the Advisor. Prior to that time, such waivers and
reimbursements may not be terminated without the approval of the Board of
Directors.
A-3
COLORADO INTERMEDIATE TAX FREE FUND, COLORADO TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED COLORADO TAX FREE FUND
SHAREHOLDER FEES(1) (fees paid directly from your investment)
MAXIMUM DEFERRED SALES CHARGE
MAXIMUM SALES CHARGE (LOAD) (LOAD) (as a % of original
IMPOSED ON PURCHASES purchase price or redemption
(as a % of offering price) proceeds, whichever is less)
------------------------------ ------------------------------
CLASS A(2) CLASS C CLASS Y CLASS A(3) CLASS C CLASS Y
---------- ------- ------- ---------- ------- -------
Colorado Intermediate Tax Free Fund 2.25% N/A None 0.00% N/A None
Colorado Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
Unaudited Pro Forma Combined Colorado Tax
Free Fund 4.25% 0.00% None 0.00% 1.00% None
(1) An annual low balance fee of $15 may be charged to any account holding a
balance that is less than the account balance minimum of $500 for any
reason, including market fluctuation. See "Policies and Services -
Purchasing, Redeeming, and Exchanging Shares - Additional Information on
Purchasing, Redeeming, and Exchanging Shares - Accounts with Low Balances"
in the Funds' prospectuses.
(2) Certain investors may qualify for reduced sales charges. Generally, Class A
share investments will qualify for a reduced sales charge if the amount of
the purchase is from $50,000 to $999,999, and the sales charge will be
eliminated if the purchase is $1 million or more.
(3) Class A share 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 if
they are sold within 18 months of purchase.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (as
a % of average net assets)
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS A Fees Fees(1) Expenses(2) Expenses(3) Expenses(4) Waivers(1,5) Expenses(1,5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate Tax
Free Fund 0.50% 0.25% 0.58% 0.00% 1.33% (0.48)% 0.85%
Colorado Tax Free Fund 0.50% 0.25% 1.05% 0.01% 1.81% (1.05)% 0.76%
Unaudited Pro Forma Combined
Colorado Tax Free Fund 0.50% 0.25% 0.60% 0.00% 1.35% (0.60)% 0.75%
A-4
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS C Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate Tax
Free Fund N/A N/A N/A N/A N/A N/A N/A
Colorado Tax Free Fund 0.50% 0.65% 1.05% 0.01% 2.21% (1.05)% 1.16%
Unaudited Pro Forma Combined
Colorado Tax Free Fund 0.50% 0.65% 0.83% 0.00% 1.98% (0.83)% 1.15%
Total
Distribution Acquired Annual
and Service Fund Fund
Management (12b-1) Other Fees and Operating Less Fee Net
CLASS Y Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------- ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate Tax
Free Fund 0.50% None 0.58% 0.00% 1.08% (0.38)% 0.70%
Colorado Tax Free Fund 0.50% None 1.05% 0.01% 1.56% (1.05)% 0.51%
Unaudited Pro Forma Combined
Colorado Tax Free Fund 0.50% None 0.47% 0.00% 0.97% (0.47)% 0.50%
(1) The Fund's distributor, Quasar Distributors, LLC, has contractually agreed
to limit its Class A 12b-1 fees for Colorado Intermediate Tax Free Fund to
0.15% through October 31, 2009.
A-5
(2) Other Expenses include administration, audit, legal, blue sky, directors,
insurance, printing, custody and transfer agent fees. As Fund assets
increase, Other Expenses typically decrease as a percentage of the Fund's
average net assets because certain expenses (e.g., transfer agent fees) are
charged on a fixed dollar amount per account or per fund basis. In addition
to benefiting from an increase in assets and corresponding decrease in
Other Expenses as a result of the Reorganization, Colorado Tax Free Fund is
expected to realize a further reduction in Other Expenses due to the
reduction in certain duplicative expenses (e.g., audit fees, annual and
semi-annual shareholder reports, and blue sky fees).
(3) In addition to the Funds' total annual operating expenses that the Funds
bear directly, the Funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the Funds invest.
(4) Total Annual Fund 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 Funds' most recent annual report and
financial highlights reflect the operating expenses of the Funds and do not
include Acquired Fund Fees and Expenses.
(5) The Advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after any waivers by the Advisor and the distributor and
excluding Acquired Fund Fees and Expenses, do not exceed 0.85% and 0.70%
for Class A and Class Y shares of Colorado Intermediate Tax Free Fund,
respectively, and 0.75%, 1.15%, and 0.50% for Class A, Class C, and Class Y
shares of Colorado Tax Free Fund, respectively. These fee waivers and
expense reimbursements may be terminated at any time after October 31,
2009, at the discretion of the Advisor. Prior to that time, such waivers
and reimbursements may not be terminated without the approval of the Board
of Directors.
EXAMPLES OF FUND EXPENSES
The examples below are intended to help you compare the cost of investing
in each Acquired Fund and corresponding Acquiring Fund, as well as the combined
fund on a pro forma basis, assuming the Reorganizations take place. 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.
The fee waivers shown in the Annual Fund Operating Expense tables above are only
reflected in the first year of each of the following time periods. Although your
actual costs and returns may differ, based on these assumptions your costs would
be:
CALIFORNIA INTERMEDIATE TAX FREE FUND, CALIFORNIA TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED CALIFORNIA TAX FREE FUND
CLASS A 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
California Intermediate Tax Free Fund $295 $564 $ 853 $1,675
California Tax Free Fund $490 $794 $1,120 $2,041
Unaudited Pro Forma Combined California Tax Free Fund $489 $744 $1,018 $1,801
A-6
CLASS C 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
California Intermediate Tax Free Fund N/A N/A N/A N/A
California Tax Free Fund (assuming redemption at end
of period) $218 $517 $941 $2,123
California Tax Free Fund (assuming no redemption at
end of period) $118 $517 $941 $2,123
Unaudited Pro Forma Combined California Tax Free Fund
(assuming redemption at end of period) $217 $480 $867 $1,953
Unaudited Pro Forma Combined California Tax Free Fund
(assuming no redemption at end of period) $117 $480 $867 $1,953
CLASS Y 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
California Intermediate Tax Free Fund $72 $293 $532 $1,219
California Tax Free Fund $52 $315 $598 $1,404
Unaudited Pro Forma Combined California Tax Free Fund $51 $251 $468 $1,093
COLORADO INTERMEDIATE TAX FREE FUND, COLORADO TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED COLORADO TAX FREE FUND
CLASS A 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund $310 $591 $ 892 $1,749
Colorado Tax Free Fund $499 $872 $1,269 $2,378
Unaudited Pro Forma Combined Colorado Tax Free Fund $498 $778 $1,078 $1,930
A-7
CLASS C 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund N/A N/A N/A N/A
Colorado Tax Free Fund (assuming redemption at end of
period) $218 $590 $1,089 $2,462
Colorado Tax Free Fund (assuming no redemption at end
of period) $118 $590 $1,089 $2,462
Unaudited Pro Forma Combined Colorado Tax Free Fund
(assuming redemption at end of period) $217 $541 $ 991 $2,239
Unaudited Pro Forma Combined Colorado Tax Free Fund
(assuming no redemption at end of period) $117 $541 $ 991 $2,239
CLASS Y 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund $72 $306 $559 $1,283
Colorado Tax Free Fund $52 $389 $750 $1,767
Unaudited Pro Forma Combined Colorado Tax Free Fund $51 $262 $490 $1,147
A-8
As filed with the Securities and Exchange Commission on November , 2008
1933 Act Registration No. 333-154172
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1 [ ] Post-Effective Amendment No. _______
(Check Appropriate Box or Boxes)
----------
FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
800 NICOLLET MALL
MINNEAPOLIS, MINNESOTA 55402
(Address of Principal Executive Offices)
(612) 303-7987
(Area Code and Telephone Number)
RICHARD J. ERTEL
FAF ADVISORS, INC.
800 NICOLLET MALL, BC-MN-H04N
MINNEAPOLIS, MINNESOTA 55402-7020
(Name and Address of Agent for Service)
Copy to:
JAMES D. ALT
DORSEY & WHITNEY LLP
50 SOUTH SIXTH STREET, SUITE 1500
MINNEAPOLIS, MINNESOTA 55402
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS POSSIBLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
----------
The title of securities being registered is common stock, par value $0.0001 per
share.
No filing fee is required because of Registrant's reliance on Section 24(f) of
the Investment Company Act of 1940, as amended.
================================================================================
FIRST AMERICAN INVESTMENT FUNDS, INC.
800 Nicollet Mall
Minneapolis, MN 55402
November __, 2008
Dear Shareholder:
As a shareholder of California Intermediate Tax Free Fund or Colorado
Intermediate Tax Free Fund (each an "Acquired Fund"), each a separate series of
First American Investment Funds, Inc. ("FAIF"), you are invited to vote on a
proposal to combine your Acquired Fund into another separate series of FAIF
(each an "Acquiring Fund"). Shareholders of California Intermediate Tax Free
Fund will be asked to vote on a proposal to combine their Fund into California
Tax Free Fund, and shareholders of Colorado Intermediate Tax Free Fund will be
asked to vote on a proposal to combine their Fund into Colorado Tax Free Fund.
The proposals will be voted on at a special meeting of shareholders to be held
on December 15, 2008 (the "Meeting"). I would like to ask for your vote on this
important proposal affecting your Acquired Fund, as described in the
accompanying Prospectus/Proxy Statement.
Each Acquired Fund has an investment objective that is substantially
similar to its Acquiring Fund. In each case, the Acquired Fund and the Acquiring
Fund seek to provide current income that is exempt from both federal income tax
and income tax of the state specified in the Fund's name, consistent with either
preservation of capital (in the case of the Acquired Funds) or prudent
investment risk (in the case of the Acquiring Funds). The Acquired Funds and the
Acquiring Funds attempt to meet their objectives by investing at least 80% of
net assets in municipal securities that pay interest exempt from federal income
tax and income tax of the applicable state, including federal and state
alternative minimum tax. The Acquired Funds and the Acquiring Funds differ,
however, with respect to the average maturity of the securities that they hold.
The Acquired Funds attempt to maintain the weighted average maturity of their
portfolio securities at 3 to 10 years under normal market conditions, whereas
the Acquiring Funds attempt to maintain the weighted average maturity of their
portfolio securities at 10 to 25 years under normal market conditions. Thus, you
are being asked to vote on a proposal to combine your Acquired Fund into an
Acquiring Fund which has a portfolio with a longer weighted average maturity and
may be, therefore, more sensitive to interest rate changes than a portfolio with
a shorter weighted average maturity.
FAF Advisors, Inc. (the "Advisor") serves as the investment advisor to the
Funds. Upon recommendation of the Advisor and after review of the Funds, the
board of directors of FAIF concluded that it is appropriate to combine each
Acquired Fund into its corresponding Acquiring Fund. The Acquired Funds and the
Acquiring Funds are all fairly small, and combining the Funds will result in
larger funds which potentially can be more efficiently managed. Combining the
Funds will also reduce duplicative expenses (i.e., audit fees, annual and
semi-annual reports, blue sky fees, etc.). In addition, the Acquiring Funds have
had comparable or better performance than the Acquired Funds for the three- and
five-year periods ended June 30, 2008 and each Acquiring Fund has lower total
expenses than its corresponding Acquired Fund, after fee waivers and expense
reimbursements by the Advisor. Finally, although each of the Acquired Funds is
somewhat larger than the corresponding Acquiring Funds, the Acquiring Funds are
part of larger mutual fund categories which historically have had larger asset
flows. Thus, the Advisor and the board of directors believe that the
longer-maturity Acquiring Funds have more potential for asset growth.
The Prospectus/Proxy Statement describes the proposed reorganization of
each Acquired Fund into its corresponding Acquiring Fund (each a
"Reorganization"). If the proposal affecting an Acquired Fund is approved by its
shareholders, all the Acquired Fund's assets will be acquired by its
corresponding Acquiring Fund in exchange solely for shares of the Acquiring Fund
and the assumption by the Acquiring Fund of all the Acquired Fund's liabilities.
Each Acquired Fund shareholder will receive shares of the corresponding
Acquiring Fund that are of the same class, and with the same total value, as
their Acquired Fund shares. The Reorganizations are intended to qualify for
federal income tax purposes as tax-free
reorganizations. As a result, it is anticipated that shareholders will not
recognize any gain or loss in connection with the Reorganizations.
THE BOARD OF DIRECTORS OF FAIF BELIEVES THAT THE REORGANIZATIONS ARE IN THE
BEST INTERESTS OF EACH ACQUIRED FUND AND ACQUIRING FUND AND THEIR SHAREHOLDERS,
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL AFFECTING YOUR
ACQUIRED FUND.
Your vote is extremely important. You can vote quickly and easily by
toll-free telephone call, by internet or by mail by following the instructions
that appear on your proxy card, which you will receive for each Acquired Fund in
which you own shares. Whether or not you expect to be present at the Meeting,
please help us to avoid the cost of a follow-up mailing by voting as soon as
possible. If you have any questions about the proxy card, please call
(800) 677-3863.
NOTE: You may receive more than one proxy package if you hold shares in
more than one Acquired Fund or account. You must return separate proxy cards for
separate holdings. Please read the entire Prospectus/Proxy Statement carefully
before you vote.
Thank you for taking this matter seriously and participating in this
important process.
Sincerely,
/s/ Thomas S. Schreier, Jr.
----------------------------------------
Thomas S. Schreier, Jr.
President
2
IMPORTANT SHAREHOLDER INFORMATION
WITHIN THIS PACKAGE YOU WILL FIND THE FOLLOWING:
- Prospectus/Proxy Statement describing the proposed reorganization
- The current prospectus of the Acquiring Funds
- The Agreement and Plan of Reorganization, attached as Appendix A
- Voting Instructions
- Proxy card
- Business reply envelope
The board of directors of First American Investment Funds, Inc. ("FAIF")
has unanimously approved the proposed reorganizations listed below and
recommends that you vote in favor of the reorganization of your Acquired Fund.
The following questions and answers provide a brief overview of the proposals.
The board of directors also encourages you to read the full text of the enclosed
Prospectus/Proxy Statement carefully.
WHAT AM I BEING ASKED TO VOTE ON?
Shareholders of each Acquired Fund are being asked to consider and approve
the proposed reorganization of that fund into the corresponding Acquiring Fund
set forth below.
Acquired Fund Acquiring Fund
------------- ------------------------
California Intermediate Tax Free Fund --> California Tax Free Fund
Colorado Intermediate Tax Free Fund --> Colorado Tax Free Fund
WHY HAS THE BOARD OF DIRECTORS RECOMMENDED THAT I VOTE IN FAVOR OF THE
REORGANIZATIONS?
The board of directors believes that the reorganizations are in the best
interests of shareholders of the Acquired Funds and may provide several benefits
to shareholders. The Acquired Funds and the Acquiring Funds are all fairly
small, and combining the Funds will result in larger funds which potentially can
be more efficiently managed. In addition, combining the Funds will reduce
duplicative expenses (i.e., audit fees, annual and semi-annual reports, blue sky
fees, etc.), and shareholders may benefit from other economies of scale often
associated with larger funds. Finally, although each Acquired Fund is somewhat
larger than its corresponding Acquiring Fund, California and Colorado long-term
tax free funds represent larger asset classes than California and Colorado
intermediate-term tax free funds, respectively, and these larger asset classes
historically have had greater asset flows. Thus, the Advisor and the board of
directors believe that the longer-maturity Acquiring Funds have more potential
for asset growth.
1
HOW DO THE FUNDS' INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES
AND RISKS COMPARE?
Each Acquired Fund has an investment objective that is substantially
similar to its Acquiring Fund. In each case, the Acquired Fund and the Acquiring
Fund seek to provide current income that is exempt from both federal income tax
and income tax of the state specified in the Fund's name, consistent with either
preservation of capital (in the case of the Acquired Funds) or prudent
investment risk (in the case of the Acquiring Funds). The Acquired Funds and the
Acquiring Funds attempt to meet their objectives by investing at least 80% of
net assets in municipal securities that pay interest exempt from federal income
tax and income tax of the applicable state, including federal and state
alternative minimum tax. The Acquired Funds and the Acquiring Funds differ,
however, with respect to the average maturity of the securities that they hold.
The Acquired Funds attempt to maintain the weighted average maturity of their
portfolio securities at 3 to 10 years under normal market conditions, whereas
the Acquiring Funds attempt to maintain the weighted average maturity of their
portfolio securities at 10 to 25 years under normal market conditions. The
Acquired Funds and Acquiring Funds are generally subject to the same risks
except that the longer-term securities in which the Acquiring Funds invest are
generally more sensitive to interest rate risk, which means that during periods
of rising interest rates the values of these securities may be more likely to
fall than are the values of shorter-term securities. A more detailed comparison
of the investment objective, principal investment strategies and risk factors of
each Acquired Fund and those of its corresponding Acquiring Fund appears in the
enclosed Prospectus/Proxy Statement.
WHICH CLASS OF SHARES WILL I RECEIVE IN THE REORGANIZATION?
You will receive the same class of shares in the Acquiring Fund that you
hold in the Acquired Fund.
WHAT ARE THE TAX CONSEQUENCES OF THE REORGANIZATIONS?
A reorganization, if approved by the affected Acquired Fund's shareholders,
will not be a taxable event for federal income tax purposes. You will not
realize any capital gain or loss as a result of the proposed reorganizations,
although you may receive a distribution of ordinary income and/or net capital
gains immediately before the reorganization to the extent that your Acquired
Fund has undistributed income and/or gain. Any distributions from interest
income that are not tax-exempt will be taxable.
WHO WILL PAY THE COSTS FOR THE REORGANIZATION?
The expenses of the reorganizations, including legal expenses, printing,
packaging, and postage, plus the cost of any supplementary solicitations, will
be borne by the Advisor.
WILL EACH FUND'S EXPENSES REMAIN THE SAME?
Each Acquired Fund has the same contractual investment advisory fees as its
corresponding Acquiring Fund. Because they are smaller in size, the total
expenses of the Acquiring Funds, before expense waivers, are higher than those
of the Acquired Funds. After fee waivers and expense reimbursements by the
Advisor, however, each Acquiring Fund has lower total expenses than its
corresponding Acquired Fund. The Advisor has contractually agreed to maintain
the Acquiring Funds' total expense ratios at their current levels through at
least October 31, 2009.
WILL I HAVE THE SAME SHAREHOLDER PRIVILEGES AFTER THE REORGANIZATION?
Yes. You will continue to enjoy the same shareholder privileges as a
shareholder of an Acquiring Fund as you currently have as a shareholder of an
Acquired Fund.
2
WHEN WOULD THE REORGANIZATIONS TAKE PLACE?
The reorganization proposal will be voted on at a special meeting of
shareholders to be held on December 15, 2008. If all necessary approvals are
obtained, the reorganizations will likely take place shortly thereafter.
WHO WILL RECEIVE THE PROXY MATERIALS?
The proxy materials are being mailed to all persons and entities that held
shares of record in the Acquired Funds on November 4, 2008. Please note that in
some cases, record ownership of and/or voting authority over Fund shares may
reside with a fiduciary or other agent. In these cases, the fiduciary or other
agent may receive the proxy.
IS THERE ANYTHING I NEED TO DO TO CONVERT MY SHARES?
No. On the closing date of the reorganization, your shares in the Acquired
Fund automatically will be exchanged for shares of the same class in the
Acquiring Fund. The total value of Acquiring Fund shares that you receive in the
reorganization will be the same as the total value of Acquired Fund shares you
hold immediately before the reorganization.
CAN I REDEEM MY SHARES BEFORE THE REORGANIZATION TAKES PLACE?
Yes. You can redeem your Acquired Fund shares at any time before the
reorganization takes place. In addition, if you hold on to your Acquired Fund
shares and receive Acquiring Fund shares in the reorganization, you then can
redeem your Acquiring Fund shares. In either case, the redemption will be a
taxable transaction. Your receipt of Acquiring Fund shares in the reorganization
will not itself be a taxable transaction.
HAS THE BOARD OF DIRECTORS OF FAIF APPROVED THE PROPOSAL?
Yes. The FAIF board has approved the proposed reorganization and recommends
that you vote FOR the proposal.
WHEN SHOULD I VOTE?
We would like to receive your vote as soon as possible. You may cast your
vote:
BY PHONE: Please see the voting instructions on your proxy card. Call the
toll-free number listed and follow the recorded instructions.
BY THE INTERNET: Visit the website listed on your proxy card. Once there,
enter the control number located on your proxy card.
BY MAIL: The proxy cards must be marked with your vote and returned in the
business reply envelope included in this package. If you misplaced your
envelope, please mail your proxy card to:
The Altman Group
1200 Wall Street West
Lyndhurst, NJ 07071
Attn: Tabulation Department
Please read the full text of the enclosed Prospectus/Proxy Statement for
further information. If you have questions, please call your investment
professional or First American Funds at (800) 677-3863.
3
FIRST AMERICAN INVESTMENT FUNDS, INC.
800 Nicollet Mall
Minneapolis, MN 55402
CALIFORNIA INTERMEDIATE TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2008
NOTICE IS HEREBY GIVEN THAT a Special Meeting of Shareholders (the
"Meeting") of California Intermediate Tax Free Fund and Colorado Intermediate
Tax Free Fund (each an "Acquired Fund"), each a separate series of First
American Investment Funds, Inc. ("FAIF"), a Maryland corporation, will be held
on December 15, 2008 at 10:00 a.m., Central time, at the offices of FAF
Advisors, Inc. (the "Advisor"), 3rd Floor - Room A, located at 800 Nicollet
Mall, Minneapolis, Minnesota 55402. The purpose of the Meeting is to consider
and act upon the following proposals and to transact any other business that
properly comes before the Meeting or any adjournments thereof. Approval of each
proposal will be determined solely by approval of the shareholders of the
Acquired Fund affected thereby. It will not be necessary for both proposals to
be approved for either one of them to be approved.
1. FOR CALIFORNIA INTERMEDIATE TAX FREE FUND SHAREHOLDERS ONLY. To approve
an Agreement and Plan of Reorganization adopted by FAIF (the
"Reorganization Plan") providing for (a) the acquisition of all the assets
of California Intermediate Tax Free Fund, a separate series of FAIF, by
California Tax Free Fund, another separate series of FAIF, in exchange
solely for shares of California Tax Free Fund, and California Tax Free
Fund's assumption of all the liabilities of California Intermediate Tax
Free Fund, followed by (b) the distribution of those California Tax Free
Fund shares to California Intermediate Tax Free Fund's shareholders in
liquidation of California Intermediate Tax Free Fund and (c) California
Intermediate Tax Free Fund's subsequent termination. A vote in favor of the
Reorganization Plan will be considered a vote in favor of an amendment to
FAIF's Amended and Restated Articles of Incorporation (the "Articles")
effecting the foregoing transactions.
2. FOR COLORADO INTERMEDIATE TAX FREE FUND SHAREHOLDERS ONLY. To approve an
Agreement and Plan of Reorganization adopted by FAIF (the "Reorganization
Plan") providing for (a) the acquisition of all the assets of Colorado
Intermediate Tax Free Fund, a separate series of FAIF, by Colorado Tax Free
Fund, another separate series of FAIF, in exchange solely for shares of
Colorado Tax Free Fund, and Colorado Tax Free Fund's assumption of all the
liabilities of Colorado Intermediate Tax Free Fund, followed by (b) the
distribution of those Colorado Tax Free Fund shares to Colorado
Intermediate Tax Free Fund's shareholders in liquidation of Colorado
Intermediate Tax Free Fund and (c) Colorado Intermediate Tax Free Fund's
subsequent termination. A vote in favor of the Reorganization Plan will be
considered a vote in favor of an amendment to FAIF's Amended and Restated
Articles of Incorporation (the "Articles") effecting the foregoing
transactions.
The Board of Directors of FAIF has fixed the close of business on November
4, 2008 as the record date for determination of shareholders of each Acquired
Fund entitled to notice of, and to vote at, the Meeting and any adjournments
thereof.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND RETURN YOUR PROXY CARD(S)
PROMPTLY. EACH SHAREHOLDER IS URGED TO COMPLETE, DATE AND SIGN, AND RETURN THE
ENCLOSED PROXY CARD(S) IN THE ENVELOPE PROVIDED, EVEN IF YOU PLAN TO ATTEND THE
MEETING. ALTERNATIVELY, YOU MAY VOTE VIA THE INTERNET OR TELEPHONE, AS INDICATED
ON THE PROXY CARD. YOU MAY REVOKE
YOUR PROXY AT ANY TIME BEFORE IT IS EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO FAIF AT
ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING IN PERSON AT THE SPECIAL
MEETING.
Dated: November __, 2008
By Order of the Board of Directors
/s/ Kathleen L. Prudhomme
----------------------------------------
Kathleen L. Prudhomme
Secretary
2
PROSPECTUS/PROXY STATEMENT
DATED NOVEMBER __, 2008
FIRST AMERICAN INVESTMENT FUNDS, INC.
800 Nicollet Mall
Minneapolis, Minnesota 55402
(800) 677-3863
CALIFORNIA INTERMEDIATE TAX FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
This Prospectus/Proxy Statement is being furnished to shareholders of
California Intermediate Tax Free Fund and Colorado Intermediate Tax Free Fund
(each an "Acquired Fund"), each a separate series of FAIF, in connection with
the solicitation of proxies by FAIF's Board of Directors (the "Board of
Directors" or the "Board") for use at the Special Meeting of Shareholders of the
Acquired Funds (the "Meeting") to be held on December 15, 2008 at 10:00 a.m.,
Central time, at the offices of FAF Advisors, Inc. (the "Advisor"), and any
adjournments thereof.
As more fully described in this Prospectus/Proxy Statement, the purpose of
the Meeting is to consider and act upon the proposed Agreement and Plan of
Reorganization (the "Reorganization Plan") pursuant to which California Tax Free
Fund and Colorado Tax Free Fund (each an "Acquiring Fund") would acquire
substantially all the assets of California Intermediate Tax Free Fund and
Colorado Intermediate Tax Free Fund, respectively, in exchange solely for shares
of the Acquiring Fund, and the assumption by the Acquiring Fund of all the
Acquired Fund's liabilities (each such exchange, together with distribution of
the shares received in the exchange, as described in the following paragraph, is
referred to in this Prospectus/Proxy Statement as a "Reorganization"). The
Acquired Funds and the Acquiring Funds are sometimes referred to herein
individually as a "Fund" and collectively as the "Funds," and the Acquired Fund
and the Acquiring Fund involved in a particular Reorganization are sometimes
referred to herein as "corresponding" Funds.
If a Reorganization is approved, shares of the Acquiring Fund involved in
that Reorganization will be distributed to the shareholders of the corresponding
Acquired Fund in liquidation of the Acquired Fund, which will be terminated as a
series of FAIF. Each shareholder of an Acquired Fund will be entitled to receive
that number of full and fractional shares of the corresponding Acquiring Fund of
the same class that he or she held in the Acquired Fund, with an aggregate net
asset value equal to the aggregate net asset value of the shareholder's Acquired
Fund shares held as of the closing date of the Reorganization. These
transactions are being structured as tax-free reorganizations. See "Information
About the Reorganizations - Federal Income Tax Considerations." Shareholders
should consult their tax advisors to determine the actual impact of a
Reorganization in light of their individual tax circumstances.
A vote to approve the Reorganization Plan will be considered a vote in
favor of an amendment to the Articles effecting a Reorganization. The amendment
is attached to the form of Reorganization Plan attached as Appendix A to this
Prospectus/Proxy Statement.
The Board of Directors has approved the proposed Reorganizations. You are
being asked to approve the Reorganization Plan (insofar as it relates to your
Acquired Fund(s)) pursuant to which the Reorganizations would be accomplished.
Because shareholders of the Acquired Funds are being asked to approve
transactions that will result in their holding shares of the corresponding
Acquiring Funds, this Prospectus/Proxy Statement also serves as a Prospectus for
the Acquiring Funds.
Each Fund is a separate non-diversified series of FAIF, a Maryland
corporation that is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"). FAF
Advisors, Inc. is the investment advisor for each of the Funds. Each Acquired
Fund has an investment objective that is substantially similar to its Acquiring
Fund. In each
case, the Acquired Fund and the Acquiring Fund seek to provide current income
that is exempt from both federal income tax and income tax of the state
specified in the Fund's name, consistent with either preservation of capital (in
the case of the Acquired Funds) or prudent investment risk (in the case of the
Acquiring Funds).
This Prospectus/Proxy Statement explains concisely the information about
each Acquiring Fund that shareholders of the corresponding Acquired Fund should
know before voting on the Reorganization. Please read it carefully and keep it
for future reference. Additional information concerning the Funds and the
Reorganization is contained in the documents described below, all of which have
been filed with the Securities and Exchange Commission ("SEC"):
- Prospectus relating to the Acquiring Funds, dated October 28, 2008,
including any supplements.
- Prospectus relating to the Acquired Funds, dated October 28, 2008,
including any supplements
- Statement of Additional Information relating to the Funds, dated
October 28, 2008, including any supplements.
- Annual report relating to the Funds for the fiscal year ended June 30,
2008.
- Statement of Additional Information, dated November __, 2008, relating
to this Prospectus/Proxy Statement and the Reorganization (the
"Reorganization SAI").
The above-referenced Prospectuses, annual report, and Statements of
Additional Information are incorporated into this Prospectus/Proxy Statement by
reference, which means that the information contained in those documents is
legally considered to be part of this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement is accompanied by a copy of the Acquiring
Funds' current prospectus (including any supplements). For a free copy of the
Acquired Funds' Prospectus, the Funds' Statement of Additional Information, the
Funds' annual report, or the Reorganization SAI, please call (800) 677-3863 or
write to First American Investment Funds, Inc., 800 Nicollet Mall, Minneapolis,
Minnesota 55402. You can also obtain copies of any of these documents without
charge on the EDGAR database on the SEC's Internet site at www.sec.gov. Copies
are available for a fee by electronic request at the following e-mail address:
publicinfo@sec.gov, or from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
2
TABLE OF CONTENTS
SUMMARY................................................................... 1
The Proposed Reorganizations........................................... 1
Comparison of Fund Expenses............................................ 2
Examples of Fund Expenses.............................................. 6
Comparison of Fund Investment Objectives and Investment Strategies..... 6
Additional Investment Strategies and Policies.......................... 9
Performance Comparison of the Funds.................................... 9
Additional Performance Information..................................... 11
Form of Organization................................................... 12
Investment Advisory Service............................................ 12
Operations of the Acquiring Funds Before and After the
Reorganizations..................................................... 13
Federal Income Tax Consequences of the Reorganizations................. 13
PRINCIPAL RISK FACTORS.................................................... 13
ADDITIONAL INFORMATION ABOUT THE FUNDS.................................... 15
Distribution of Shares................................................. 15
Purchase and Redemption Procedures and Exchange Privileges............. 16
Dividends and Other Distributions; Taxes............................... 17
Taxes.................................................................. 17
INFORMATION ABOUT THE REORGANIZATIONS..................................... 18
Agreement and Plan of Reorganization................................... 18
Reasons for the Reorganizations........................................ 19
Description of Securities to be Issued................................. 21
Federal Income Tax Considerations...................................... 21
Capitalization......................................................... 22
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE............................... 25
FINANCIAL HIGHLIGHTS...................................................... 25
VOTING INFORMATION........................................................ 25
General Information.................................................... 25
Voting Rights and Required Vote........................................ 25
Outstanding Shares..................................................... 27
Shareholder Rights..................................................... 27
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 27
ADDITIONAL INFORMATION ABOUT THE FUNDS.................................... 28
MISCELLANEOUS............................................................. 28
Legal Matters.......................................................... 28
Experts................................................................ 28
Other Business......................................................... 29
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.... 29
i
BOARD RECOMMENDATION...................................................... 29
APPENDIX A - AGREEMENT AND PLAN OF REORGANIZATION......................... A-1
ii
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Proxy Statement, the Funds' prospectuses (which are incorporated
herein by reference), and the Reorganization Plan (which is attached as Appendix
A hereto). This summary may not contain all of the information that is important
to you. Shareholders should read the entire Prospectus/Proxy Statement for more
complete information.
THE PROPOSED REORGANIZATIONS
The Board of Directors considered and approved the Reorganizations at a
meeting of the Board held on September 23-25, 2008. The Reorganizations would
combine each Acquired Fund into a corresponding Acquiring Fund. The
Reorganizations are proposed to be accomplished pursuant to the Reorganization
Plan, which provides for the acquisition of all the assets of each Acquired Fund
by its corresponding Acquiring Fund, in exchange solely for shares of that
Acquiring Fund and the assumption by that Acquiring Fund of all the Acquired
Fund's liabilities. Approval of each Reorganization will be determined solely by
a vote of the majority of outstanding shares of the Acquired Fund involved. It
will not be necessary for both Reorganizations to be approved for either one of
them to take place.
If a Reorganization is approved, the Acquired Fund involved therein will
cease to exist and the shareholders of the Acquired Fund will become
shareholders of the Acquiring Fund listed opposite that Acquired Fund's name in
the table below. You will receive shares of the Acquiring Fund that are of the
same class, and with the same total value, as the Acquired Fund shares you hold
as of the closing date of the Reorganization.
ACQUIRED FUND ACQUIRING FUND
-------------------------------------- ----------------------------------------
California Intermediate Tax Free Fund California Tax Free Fund
Colorado Intermediate Tax Free Fund Colorado Tax Free Fund
Each Acquired Fund has an investment objective that is substantially
similar to its Acquiring Fund. In each case, the Acquired Fund and the Acquiring
Fund seek to provide current income that is exempt from both federal income tax
and income tax of the state specified in the Fund's name, consistent with either
preservation of capital (in the case of the Acquired Funds) or prudent
investment risk (in the case of the Acquiring Funds). The Acquired Funds and the
Acquiring Funds attempt to meet their objectives by investing at least 80% of
net assets in municipal securities that pay interest exempt from federal income
tax and income tax of the applicable state, including federal and state
alternative minimum tax. The Acquired Funds and the Acquiring Funds differ,
however, with respect to the average maturity of the securities which they hold.
The Acquired Funds attempt to maintain the weighted average maturity of their
portfolio securities at 3 to 10 years under normal market conditions, whereas
the Acquiring Funds attempt to maintain the weighted average maturity of their
portfolio securities at 10 to 25 years under normal market conditions. The
Acquired Funds and Acquiring Funds are generally subject to the same risks
except that the longer-term securities in which the Acquiring Funds invest are
generally more sensitive to interest rate risk, which means that during periods
of rising interest rates the values of these securities are more likely to fall
than are the values of shorter-term securities. For more complete information
regarding the investment objectives, principal investment strategies and
principal risk factors of each Acquired Fund compared with those of the
Acquiring Fund with which it will be combined, please refer to the "Summary -
Comparison of Fund Investment Objectives and Investment Strategies" and
"Principal Risk Factors" sections below.
The Acquired Funds and the Acquiring Funds currently offer Class A and
Class Y shares. The Acquiring Funds also offer Class C shares. The Class A and
Class Y shares of each Acquired Fund have identical characteristics to the Class
A and Class Y shares, respectively, of the corresponding Acquiring
1
Fund for which they will be exchanged. The Reorganizations will not affect your
right to purchase and redeem shares, to exchange among other First American
Funds or to receive dividends and other distributions. No sales charges will be
imposed on the issuance of each Acquiring Fund's shares as a result of the
Reorganizations. For more information about the characteristics of Class A and Y
shares of the Funds, see the "Additional Information about the Funds" below.
As described more fully below under "Information about the Reorganizations
- Reasons for the Reorganizations," the Board of Directors, which is composed
solely of directors who are not "interested persons," as such term is defined in
the 1940 Act (the "Independent Directors"), has concluded that the
Reorganizations are in the best interests of the shareholders of Acquired Funds
and the Acquiring Funds and that the interests of existing shareholders will not
be diluted as a result of the transactions contemplated by the Reorganizations.
Therefore, the Board of Directors has approved the Reorganizations and has
submitted the Reorganization Plan for approval by each Acquired Fund's
shareholders. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THE REORGANIZATION OF YOUR ACQUIRED FUND.
COMPARISON OF FUND EXPENSES
As an investor, you pay fees and expenses to buy and hold shares of a Fund.
Shareholder fees are paid directly when you buy or sell shares. You pay annual
fund operating expenses indirectly since they are deducted from Fund assets.
The following tables allow you to compare the shareholder fees and annual
fund operating expenses that you may pay for buying and holding Class A and
Class Y shares of each Acquired Fund and the corresponding Acquiring Fund. The
"Unaudited Pro Forma Combined Fund" column in each table below shows you what
the fees and expenses are estimated to be assuming the Reorganizations are
approved. Fee and expense information for Class C shares, which are only offered
by the Acquiring Funds, is also presented.
As shown in the tables below, the maximum sales charge imposed on purchases
of Class A shares for each Acquired Fund are lower than that of Acquiring Fund
and Unaudited Pro Forma Combined Fund maximum sales charges. While Class A
shareholders will not pay a sales charge in connection with the Reorganizations,
they may be subject to the higher sales charge on purchases of Acquiring Fund
Class A shares occurring after the Reorganizations.
The tables below also compare the annual fund operating expenses as a
percentage of average daily net assets for each Fund for the fiscal year ended
June 30, 2008, and pro forma expenses, based on the annual fund operating
expenses for the Acquiring Fund's shares.
2
CALIFORNIA INTERMEDIATE TAX FREE FUND, CALIFORNIA TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED CALIFORNIA TAX FREE FUND
SHAREHOLDER FEES(1) (fees paid directly from your investment)
MAXIMUM DEFERRED SALES CHARGE
MAXIMUM SALES CHARGE (LOAD) (LOAD) (as a % of original
IMPOSED ON PURCHASES purchase price or redemption
(as a % of offering price) proceeds, whichever is less)
------------------------------ ------------------------------
CLASS A(2) CLASS C CLASS Y CLASS A(3) CLASS C CLASS Y
---------- ------- ------- ---------- ------- -------
California Intermediate Tax Free Fund 2.25% N/A None 0.00% N/A None
California Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
Unaudited Pro Forma Combined
California Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
(1) An annual low balance fee of $15 may be charged to any account holding a
balance that is less than the account balance minimum of $500 for any
reason, including market fluctuation. See "Policies and Services -
Purchasing, Redeeming, and Exchanging Shares - Additional Information on
Purchasing, Redeeming, and Exchanging Shares - Accounts with Low Balances"
in the Funds' prospectuses.
(2) Certain investors may qualify for reduced sales charges. Generally, Class A
share investments will qualify for a reduced sales charge if the amount of
the purchase is from $50,000 to $999,999, and the sales charge will be
eliminated if the purchase is $1 million or more.
(3) Class A share 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 if
they are sold within 18 months of purchase.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (as
a % of average net assets)
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS A Fees Fees(1) Expenses(2) Expenses(3) Expenses(4) Waivers(1,5) Expenses(1,5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate
Tax Free Fund 0.50% 0.25% 0.52% 0.00% 1.27% (0.57)% 0.70%
California Tax Free Fund 0.50% 0.25% 0.71% 0.01% 1.47% (0.81)% 0.66%
Unaudited Pro Forma
Combined California
Tax Free Fund 0.50% 0.25% 0.48% 0.00% 1.23% (0.58)% 0.65%
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS C Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate
Tax Free Fund N/A N/A N/A N/A N/A N/A N/A
California Tax Free Fund 0.50% 0.65% 0.70% 0.01% 1.86% (0.70)% 1.16%
Unaudited Pro Forma
Combined California
Tax Free Fund 0.50% 0.65% 0.54% 0.00% 1.69% (0.54)% 1.15%
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS Y Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
California Intermediate 0.50% None 0.52% 0.00% 1.02% (0.32)% 0.70%
Tax Free Fund
California Tax Free Fund 0.50% None 0.70% 0.01% 1.21% (0.70)% 0.51%
Unaudited Pro Forma
Combined California
Tax Free Fund 0.50% None 0.42% 0.00% 0.92% (0.42)% 0.50%
(1) The Fund's distributor, Quasar Distributors, LLC, has contractually agreed
to limit its Class A 12b-1 fees for California Intermediate Tax Free Fund
to 0.15% through October 31, 2009. The Advisor has contractually agreed, in
addition to other fee waivers and reimbursements, to reimburse an amount of
Class A share 12b-1 fees equal to 0.15% and 0.10% of average daily net
assets for California Intermediate Tax Free Fund and California Tax Free
Fund, respectively, through October 31, 2009.
(2) Other Expenses include administration, audit, legal, blue sky, directors,
insurance, printing, custody and transfer agent fees. As Fund assets
increase, Other Expenses typically decrease as a percentage of the Fund's
average net assets because certain expenses (e.g., transfer agent fees) are
charged on a fixed dollar amount per account or per fund basis. In addition
to benefiting from an increase in assets and corresponding decrease in
Other Expenses as a result of the Reorganization, California Tax Free Fund
is expected to realize a further reduction in Other Expenses due to the
reduction in certain duplicative expenses (e.g., audit fees, annual and
semi-annual shareholder reports, and blue sky fees).
3
(3) In addition to the Funds' total annual operating expenses that the Funds
bear directly, the Funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the Funds invest.
(4) Total Annual Fund 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 Funds' most recent annual report and
financial highlights reflect the operating expenses of the Funds and do not
include Acquired Fund Fees and Expenses.
(5) The Advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after any waivers by the Advisor and the distributor and
excluding Acquired Fund Fees and Expenses, do not exceed 0.70% for both
Class A and Class Y shares of California Intermediate Tax Free Fund and
0.65%, 1.15%, and 0.50% for Class A, Class C and Class Y shares of
California Tax Free Fund, respectively. These fee waivers and expense
reimbursements may be terminated at any time after October 31, 2009, at the
discretion of the Advisor. Prior to that time, such waivers and
reimbursements may not be terminated without the approval of the Board of
Directors.
COLORADO INTERMEDIATE TAX FREE FUND, COLORADO TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED COLORADO TAX FREE FUND
SHAREHOLDER FEES(1) (fees paid directly from your investment)
MAXIMUM DEFERRED SALES CHARGE
MAXIMUM SALES CHARGE (LOAD) (LOAD) (as a % of original
IMPOSED ON PURCHASES purchase price or redemption
(as a % of offering price) proceeds, whichever is less)
------------------------------ ------------------------------
CLASS A(2) CLASS C CLASS Y CLASS A(3) CLASS C CLASS Y
---------- ------- ------- ---------- ------- -------
Colorado Intermediate Tax Free Fund 2.25% N/A None 0.00% N/A None
Colorado Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
Unaudited Pro Forma Combined
Colorado Tax Free Fund 4.25% 0.00% None 0.00% 1.00% None
(1) An annual low balance fee of $15 may be charged to any account holding a
balance that is less than the account balance minimum of $500 for any
reason, including market fluctuation. See "Policies and Services -
Purchasing, Redeeming, and Exchanging Shares - Additional Information on
Purchasing, Redeeming, and Exchanging Shares - Accounts with Low Balances"
in the Funds' prospectuses.
(2) Certain investors may qualify for reduced sales charges. Generally, Class A
share investments will qualify for a reduced sales charge if the amount of
the purchase is from $50,000 to $999,999, and the sales charge will be
eliminated if the purchase is $1 million or more.
(3) Class A share 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 if
they are sold within 18 months of purchase.
4
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (as
a % of average net assets)
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS A Fees Fees(1) Expenses(2) Expenses(3) Expenses(4) Waivers(1,5) Expenses(1,5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate
Tax Free Fund 0.50% 0.25% 0.58% 0.00% 1.33% (0.48)% 0.85%
Colorado Tax Free Fund 0.50% 0.25% 1.05% 0.01% 1.81% (1.05)% 0.76%
Unaudited Pro Forma
Combined Colorado Tax
Free Fund 0.50% 0.25% 0.60% 0.00% 1.35% (0.60)% 0.75%
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS C Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate
Tax Free Fund N/A N/A N/A N/A N/A N/A N/A
Colorado Tax Free Fund 0.50% 0.65% 1.05% 0.01% 2.21% (1.05)% 1.16%
Unaudited Pro Forma
Combined Colorado Tax
Free Fund 0.50% 0.65% 0.83% 0.00% 1.98% (0.83)% 1.15%
Total
Distribution Acquired Annual
and Service Fund Fees Fund
Management (12b-1) Other and Operating Less Fee Net
CLASS Y Fees Fees Expenses(2) Expenses(3) Expenses(4) Waivers(5) Expenses(5)
------------------------ ---------- ------------ ----------- ----------- ----------- ------------ -------------
Colorado Intermediate
Tax Free Fund 0.50% None 0.58% 0.00% 1.08% (0.38)% 0.70%
Colorado Tax Free Fund 0.50% None 1.05% 0.01% 1.56% (1.05)% 0.51%
Unaudited Pro Forma
Combined Colorado Tax
Free Fund 0.50% None 0.47% 0.00% 0.97% (0.47)% 0.50%
(1) The Fund's distributor, Quasar Distributors, LLC, has contractually agreed
to limit its Class A 12b-1 fees for Colorado Intermediate Tax Free Fund to
0.15% through October 31, 2009.
(2) Other Expenses include administration, audit, legal, blue sky, directors,
insurance, printing, custody and transfer agent fees. As Fund assets
increase, Other Expenses typically decrease as a percentage of the Fund's
average net assets because certain expenses (e.g., transfer agent fees) are
charged on a fixed dollar amount per account or per fund basis. In addition
to benefiting from an increase in assets and corresponding decrease in
Other Expenses as a result of the Reorganization, Colorado Tax Free Fund is
expected to realize a further reduction in Other Expenses due to the
reduction in certain duplicative expenses (e.g., audit fees, annual and
semi-annual shareholder reports, and blue sky fees).
(3) In addition to the Funds' total annual operating expenses that the Funds
bear directly, the Funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the Funds invest.
(4) Total Annual Fund 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 Funds' most recent annual report and
financial highlights reflect the operating expenses of the Funds and do not
include Acquired Fund Fees and Expenses.
(5) The Advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after any waivers by the Advisor and the distributor and
excluding Acquired Fund Fees and Expenses, do not exceed 0.85% and 0.70%
for Class A and Class Y shares of Colorado Intermediate Tax Free Fund,
respectively, and 0.75%, 1.15%, and 0.50% for Class A, Class C, and Class Y
shares of Colorado Tax Free Fund, respectively. These fee waivers and
expense reimbursements may be terminated at any time after October 31,
2009, at the discretion of the Advisor. Prior to that time, such waivers
and reimbursements may not be terminated without the approval of the Board
of Directors.
5
EXAMPLES OF FUND EXPENSES
The examples below are intended to help you compare the cost of investing
in each Acquired Fund and corresponding Acquiring Fund, as well as the combined
fund on a pro forma basis, assuming the Reorganizations take place. 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.
The fee waivers shown in the Annual Fund Operating Expense tables above are only
reflected in the first year of each of the following time periods. Although your
actual costs and returns may differ, based on these assumptions your costs would
be:
CALIFORNIA INTERMEDIATE TAX FREE FUND, CALIFORNIA TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED CALIFORNIA TAX FREE FUND
CLASS A 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
California Intermediate Tax Free Fund $295 $564 $ 853 $1,675
California Tax Free Fund $490 $794 $1,120 $2,041
Unaudited Pro Forma Combined California Tax Free Fund $489 $744 $1,018 $1,801
CLASS C 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
California Intermediate Tax Free Fund N/A N/A N/A N/A
California Tax Free Fund (assuming redemption
at end of period) $218 $517 $941 $2,123
California Tax Free Fund (assuming no
redemption at end of period) $118 $517 $941 $2,123
Unaudited Pro Forma Combined California Tax
Free Fund (assuming redemption at end of
period) $217 $480 $867 $1,953
Unaudited Pro Forma Combined California Tax
Free Fund (assuming no redemption at end of
period) $117 $480 $867 $1,953
CLASS Y 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
California Intermediate Tax Free Fund $72 $293 $532 $1,219
California Tax Free Fund $52 $315 $598 $1,404
Unaudited Pro Forma Combined California Tax Free Fund $51 $251 $468 $1,093
COLORADO INTERMEDIATE TAX FREE FUND, COLORADO TAX FREE FUND
AND UNAUDITED PRO FORMA COMBINED COLORADO TAX FREE FUND
CLASS A 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund $310 $591 $ 892 $1,749
Colorado Tax Free Fund $499 $872 $1,269 $2,378
Unaudited Pro Forma Combined Colorado Tax Free Fund $498 $778 $1,078 $1,930
CLASS C 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund N/A N/A N/A N/A
Colorado Tax Free Fund (assuming redemption at
end of period) $218 $590 $1,089 $2,462
Colorado Tax Free Fund (assuming no redemption
at end of period) $118 $590 $1,089 $2,462
Unaudited Pro Forma Combined Colorado Tax Free
Fund (assuming redemption at end of period) $217 $541 $ 991 $2,239
Unaudited Pro Forma Combined Colorado Tax Free
Fund (assuming no redemption at end of period) $117 $541 $ 991 $2,239
CLASS Y 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------- ------ ------- ------- --------
Colorado Intermediate Tax Free Fund $72 $306 $559 $1,283
Colorado Tax Free Fund $52 $389 $750 $1,767
Unaudited Pro Forma Combined Colorado Tax Free Fund $51 $262 $490 $1,147
6
COMPARISON OF FUND INVESTMENT OBJECTIVES AND INVESTMENT STRATEGIES
The following table compares the investment objectives and principal
investment strategies of the Acquired Funds and the Acquiring Funds. Please
review the table carefully.
As described below, the investment objective of each Acquired Fund is
substantially similar to that of its corresponding Acquiring Fund. A Fund's
objective may be changed without shareholder approval. If a Fund's objective
changes, you would be notified at least 60 days in advance. Please remember,
there is no guarantee that any Fund will achieve its objective.
As more fully set forth below, the principal investment strategies of each
Acquired Fund are identical to those of its corresponding Acquiring Fund, except
with respect to the average maturity of the securities which the Funds hold. A
Fund's principal investment strategies are the strategies that the Advisor
believes are most likely to be important in trying to achieve the Fund's
objective. You should be aware that each Fund may also use strategies to invest
in securities that are not described in this Prospectus/Proxy Statement but that
are described in its prospectus and/or SAI.
7
ACQUIRED FUNDS ACQUIRING FUNDS
------------------------------- --------------------------------
Investment Providing current income that Providing current income that is
Objective: is exempt from both federal exempt from both federal income
income tax and from the income tax and from the income tax of
tax of the state specified in the state specified in the
the Acquired Fund's name, to Acquiring Fund's name, to the
the extent consistent with extent consistent with prudent
preservation of capital. investment risk.
Principal Under normal market conditions, each Acquired Fund and each
Investment Acquiring Fund invests at least 80% of its net assets (plus the
Strategies: amount of any borrowings for investment purposes) in municipal
securities that pay interest that is exempt from federal and the
applicable state's income tax, including federal and state
alternative minimum tax. Each Fund will provide shareholders with
at least 60 days notice before changing this policy.
Each Acquired Fund and each Acquiring 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 the
applicable state's alternative minimum tax.
Each Acquired Fund and each Acquiring Fund may invest in "general
obligation" bonds, "revenue" bonds, participation interests in
municipal leases, and zero coupon municipal securities. These
securities may have fixed or variable rates of interest, including
rates that reset on a periodic basis.
Each Acquired Fund and each Acquiring Fund invests mainly in
securities that, at the time of purchase, are either rated
investment grade by Moody's, Standard & Poor's, and/or Fitch, or
are unrated and determined to be of comparable quality by the
Advisor. However, each Acquired Fund and each Acquiring Fund may
invest up to 20% 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"), provided the
securities are rated at least "B," or are unrated and determined
to be of comparable quality by the Advisor, at the time of
investment. If the rating of a security is reduced or discontinued
after purchase, the impacted Fund is not required to sell the
security, but may consider doing so.
Each Acquired Fund attempts to maintain the weighted average
maturity of its portfolio securities at 3 to 10 years under normal
market conditions. Each Acquiring Fund attempts to maintain the
weighted average maturity of its portfolio securities at 10 to 25
years under normal market conditions.
Each Acquired Fund and each Acquiring Fund may utilize futures
contracts and options on futures contracts to hedge against market
risk, credit risk and yield curve risk, and to manage the
effective maturity or duration of each Fund's portfolio. No
Acquired Fund or Acquiring Fund may use such instruments to gain
exposure to a security or type of security that it would be
prohibited by its investment restrictions from purchasing
directly.
8
ADDITIONAL INVESTMENT STRATEGIES AND POLICIES
In addition to the principal investment strategies of each Fund described
above, each Fund may also engage in other types of investment practices,
including:
Temporary Investments. In an attempt to respond to adverse market,
economic, political, or other conditions, each Acquired Fund and each Acquiring
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 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 below shows each Fund's
historical portfolio turnover rate.
Fundamental and Non-Fundamental Investment Restrictions. Each of the Funds
is subject to the same fundamental and non-fundamental investment restrictions,
as set forth in the Funds' SAI. Fundamental investment restrictions 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. Non-fundamental
investment restrictions may be changed by the Board without a shareholder vote.
Additional information about each Fund's investment strategies and policies
is set forth in the Fund's prospectus and SAI. The Acquiring Funds' prospectus
is enclosed with this Prospectus/Proxy Statement. The Acquired Funds' prospectus
and the Funds' SAI are available upon request by calling (800)677-3863.
PERFORMANCE COMPARISON OF THE FUNDS
The performance information below compares the performance of each Acquired
Fund to that of its corresponding Acquiring Fund. The bar charts and tables
illustrate the variability of each Fund's performance over time. Of course, past
performance (before and after taxes) is not an indication of future results.
The bar charts show how the performance of each 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 tables compare the performance for each share class of each Fund over
different time periods, before and after taxes, to that of the respective 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 benchmarks are unmanaged, have no
expenses, and are unavailable for investment. For Class A shares, the tables
include returns both before and after taxes. For Class Y shares, the tables only
include returns before taxes. After-tax returns for Class Y shares will vary.
After-tax returns are calculated using the historically highest individual
federal marginal income tax rates, but do not reflect the impact of state or
local taxes. Actual after-tax returns depend on your tax situation and may
differ from the returns shown below.
The bar charts and tables assume reinvestment of all dividends and other
distributions. Performance reflects fee waivers in effect. If these fee waivers
were not in place, each Fund's performance would be reduced.
9
PERFORMANCE COMPARISON: CALIFORNIA INTERMEDIATE TAX FREE FUND AND CALIFORNIA TAX
FREE FUND
CALIFORNIA INTERMEDIATE TAX FREE FUND
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% 3.92% 2.92%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Best Quarter:
Quarter ended September 30, 2002 4.74%
Worst Quarter:
Quarter ended June 30, 2004 (1.96)%
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07 Date One Year Five Years Ten Year
---------------------------- --------- -------- ---------- --------
California Intermediate Tax Free Fund
Class A (return before taxes) 8/8/97 0.56% 2.83% 4.11%
Class A (return after taxes on distributions) 0.53% 2.75% 4.05%
Class A (return after taxes on distributions and sale
of fund shares) 1.67% 2.93% 4.08%
Class Y (return before taxes) 8/8/97 3.01% 3.43% 4.46%
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
Lipper California Intermediate Municipal Debt Funds
Category Average(3)
(reflects no deduction for sales charges or taxes) 2.65% 2.84% 4.21%
(1) Total return for the period from 1/1/08 through 9/30/08 was (1.39)%.
(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 in California.
CALIFORNIA TAX FREE FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
4.31% 9.33% 4.98% 4.76% 2.93% 4.44% 2.46%
2001 2002 2003 2004 2005 2006 2007
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 12/31/07 Date One Year Five Years Inception
---------------------------- --------- -------- ---------- ---------
California Tax Free Fund
Class A (return before taxes) 2/1/00 (1.92)% 3.02% 5.46%
Class A (return after taxes on distributions) (1.99)% 2.92% 5.35%
Class A (return after taxes on distributions and sale
of fund shares) 0.20% 3.14% 5.29%
Class C (return before taxes) 2/1/00 1.04% 3.49% 5.63%
Class Y (return before taxes) 2/1/00 2.59% 4.16% 6.29%
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 6.08%
Lipper California Municipal Debt Funds Category
Average(3)
(reflects no deduction for sales charges or taxes) 0.42% 3.61% 5.43%
(1) Total return for the period from 1/1/08 through 9/30/08 was (4.72)%.
(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 California.
10
PERFORMANCE COMPARISON: COLORADO INTERMEDIATE TAX FREE FUND AND COLORADO TAX
FREE FUND
COLORADO INTERMEDIATE TAX FREE FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
5.44% (1.58)% 8.52% 5.59% 8.70% 4.09% 2.98% 1.91% 3.61% 2.93%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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 12/31/07 Date One Year Five Years Ten Years
---------------------------- --------- -------- ---------- --------
Colorado Intermediate Tax Free Fund
Class A (return before taxes) 4/4/94 0.63% 2.65% 3.94%
Class A (return after taxes on distributions) 0.55% 2.57% 3.89%
Class A (return after taxes on distributions and sale
of fund shares) 1.86% 2.82% 3.96%
Class Y (return before taxes) 4/4/94 3.09% 3.27% 4.27%
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
Lipper Other States Intermediate Municipal Debt Funds
Category Average(3)
(reflects no deduction for sales charges or taxes) 2.93% 2.78% 3.79%
(1) Total return for the period from 1/1/08 through 9/30/08 was (1.18)%.
(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.
COLORADO TAX FREE FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR (CLASS A)(1)
(BAR CHART)
5.35% 10.35% 5.26% 4.27% 3.09% 4.12% 0.45%
2001 2002 2003 2004 2005 2006 2007
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 12/31/07 Date One Year Five Years Inception
---------------------------- --------- -------- ---------- ---------
Colorado Tax Free Fund
Class A (return before taxes) 2/1/00 (3.81)% 2.54% 5.23%
Class A (return after taxes on distributions) (3.86)% 2.35% 5.09%
Class A (return after taxes on distributions and sale
of fund shares) (0.96)% 2.76% 5.14%
Class C (return before taxes) 2/1/00 (0.91)% 3.03% 5.39%
Class Y (return before taxes) 2/1/00 0.70% 3.68% 6.08%
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 6.08%
Lipper Colorado Municipal Debt Funds Category Average(3)
(reflects no deduction for sales charges or taxes) 1.63% 3.61% 5.48%
(1) Total return for the period from 1/1/08 through 9/30/08 was (3.56)%.
(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 Colorado.
11
ADDITIONAL PERFORMANCE INFORMATION
Information concerning the factors that materially affected each Fund's
performance during the fiscal year ended June 30, 2008, is excerpted from the
Funds' annual report for such year and included in "Management's Discussion of
Fund Performance" below.
FORM OF ORGANIZATION
Each Fund is a separate non-diversified series of FAIF, a Maryland
corporation that is registered as an open-end management investment company
under the 1940 Act. 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
43 series, including the Funds. Each series of shares represents a separate
investment portfolio with its own investment objective and policies.
INVESTMENT ADVISORY SERVICE
Each Fund has the same investment advisor, FAF Advisors, Inc. Pursuant to
an Investment Advisory Agreement with FAIF, the Advisor manages the Funds'
business and investment activities, subject to the authority of the Board of
Directors.
The Advisor is located at 800 Nicollet Mall, Minneapolis, MN 55402. The
Advisor is a subsidiary of U.S. Bank National Association (which, in turn, is a
subsidiary of U.S. Bancorp). The Advisor provides investment management services
to individuals and institutions, including corporations, foundations, pensions
and retirement plans. As of September 30, 2008, the Advisor had more than $99
billion in assets under management, including investment company assets of more
than $86 billion.
The portfolio managers primarily responsible for the management of an
Acquired Fund are the same individuals who are primarily responsible for the
management of the corresponding Acquiring fund. Information on these individuals
is set forth below.
California Intermediate Tax Free Fund and California Tax Free Fund.
Christopher L Drahn is the primary portfolio manager for each Fund, and Michael
S. Hamilton co-manages each Fund. Mr. Drahn has served as the primary portfolio
manager for California Intermediate Tax Free Fund and Mr. Hamilton has
co-managed the Fund since August 1997. Mr. Drahn has served as the primary
portfolio manager for California Tax Free Fund since May 2005, prior to which he
had co-managed the Fund since February 2000. Mr. Hamilton has co-managed
California Tax-Free Fund since May 2005, prior to which he had served as the
primary portfolio manager for the Fund since December 2002.
Colorado Intermediate Tax Free Fund and Colorado Tax Free Fund. Christopher
L. Drahn is the primary portfolio manager for each Fund, and Michael L. Welle
co-manages each Fund. Mr. Drahn has served as the primary portfolio manager for
Colorado Intermediate Tax Free Fund since April 1994 and Mr. Welle has
co-managed the Fund since June 2007. Mr. Drahn has served as the primary
portfolio manager for Colorado Tax Free Fund since June 2007, prior to which he
had co-managed the Fund since February 2000. Mr. Welle has co-managed Colorado
Tax Free Fund since June 2007.
Portfolio Manager Biographies
Christopher L. Drahn, CFA, Senior Fixed-Income Portfolio Manager, entered
the financial services industry when he joined the Advisor in 1980.
12
Michael S. Hamilton, Senior Fixed-Income Portfolio Manager, entered the
financial services industry when he joined the Advisor in 1989.
Michael L. Welle, CFA, Fixed-Income trader, Portfolio Manager, entered the
financial services industry when he joined the Advisor in 1992.
OPERATIONS OF THE ACQUIRING FUNDS BEFORE AND AFTER THE REORGANIZATIONS
Based on its review of each Fund's investment portfolio, the Advisor
believes that all of the assets held by each Acquired Fund will be consistent
with the corresponding Acquiring Fund's investment objective and policies and
thus can be transferred to and held by that Acquiring Fund if the Reorganization
Plan is approved for that Fund. If prior to the time of the Reorganizations,
either Acquired Fund were to hold any assets that the corresponding Acquiring
Fund were not allowed to hold, those assets would be sold prior to the
Reorganizations. The proceeds of those sales would be held in temporary
investments or reinvested in assets that the corresponding Acquiring Fund may
hold. The possible need for an Acquired Fund to dispose of assets prior to the
Reorganizations could result in selling securities at a disadvantageous time and
could result in an Acquired Fund's realizing losses that would not otherwise
have been realized. Alternatively, these sales could result in an Acquired
Fund's realizing gains that would not otherwise have been realized, the net
proceeds of which would be included in a distribution to its shareholders prior
to the Reorganizations.
After the Reorganizations, and in response to prevailing market conditions
at such time, it is possible that the Acquiring Funds will make changes in
portfolio holdings in an effort to adjust the weighted average maturities of
their respective portfolios or to respond to other market conditions. This may
result in increased trading of securities, which may produce capital gains
taxable to shareholders upon distribution and may result in increased trading
costs for the Funds.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
As a condition to the closing of each Reorganization, FAIF will receive an
opinion from Dorsey & Whitney LLP to the effect that the Reorganization will
qualify as a tax-free reorganization for federal income tax purposes.
Accordingly, shareholders will not recognize taxable gain or loss as a direct
result of a Reorganization. Each Acquired Fund shareholder's aggregate tax basis
in the Acquiring Fund shares it receives in a Reorganization will be the same as
the aggregate tax basis in the Acquired Fund shares the shareholder
constructively exchanges therefor, and the shareholder's holding period for
those Acquiring Fund shares will include its holding period for those Acquired
Fund shares. In addition, an Acquiring Fund's aggregate tax basis in the assets
it receives from the corresponding Acquired Fund will be the same as the
latter's aggregate tax basis therein, and the Acquiring Fund's holding period
for those assets will include that Acquired Fund's holding period therefor
immediately before the Reorganization.
If an Acquired Fund sells securities prior to the closing of a
Reorganization, it may recognize net gains or losses. Any net gains recognized
on those sales would increase the amount of any distribution that the Acquired
Fund must make to its shareholders prior to that closing. You should separately
consider any state, local and other tax consequences in consultation with your
tax advisor. See "Information about the Reorganizations - Federal Income Tax
Considerations" below for more detailed information about federal income tax
considerations.
PRINCIPAL RISK FACTORS
As indicated above, the investment objective of each Acquired Fund is
substantially similar to that of its corresponding Acquiring Fund. In addition,
all of the Funds seek to meet their objective by investing at least 80% of net
assets in municipal securities that pay interest exempt from federal income tax
and income tax of the applicable state. Therefore, the Funds are generally
subject to the same risks. However, because the Acquired Funds attempt to
maintain the weighted average maturity of their portfolio securities at 3 to 10
years under normal market conditions, whereas the Acquiring Funds attempt to
maintain the weighted average maturity of their portfolio securities at 10 to 25
years under normal market conditions, the Acquiring Funds are generally subject
to greater interest rate risk. See "Interest Rate Risk" below. Set forth below
are the principal risks of investing in the Funds. For all of the Funds, the
price and yield will change daily due to changes in interest rates and other
factors, which means you could lose money.
13
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 its benchmark or 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.
EXTENSION RISK. Some municipal bond issuers may have the right to pay
principal on an obligation later than scheduled, which would cause cash flows to
be returned later than expected. This typically results when interest rates have
increased and, as a result of the delay in cash flows, a Fund would suffer from
the inability to invest in higher yielding securities.
FUTURES RISK. The use of futures contracts exposes a Fund to additional
risks and transaction costs. Risks inherent in the use of futures contracts
include: the risk that securities prices, index prices, or interest rates will
not move in the direction that the advisor anticipates; an imperfect correlation
between the price of the futures contract 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 a futures contract can result in a loss substantially greater than
the Fund's initial investment in that futures contract; and 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 futures
contracts and the advisor's judgment proves incorrect, the Fund's performance
could be worse than if it had not used these instruments.
HIGH-YIELD SECURITIES RISK. Each Fund may invest in high-yield securities.
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. High-yield securities may be more
susceptible to real or perceived adverse economic conditions than investment
grade securities. 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), 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, usually making them more volatile than securities with shorter
maturities. Thus, because the Acquiring Funds attempt to maintain the weighted
average maturity of their portfolio securities at 10 to 25 years under normal
market conditions, whereas the Acquired Funds attempt to maintain the weighted
average maturity of their portfolio securities at 3 to 10 years under normal
market conditions, the Acquiring Funds are generally subject to greater interest
rate risk. Each Fund may invest
14
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.
LIQUIDITY RISK. Each Fund is exposed to liquidity risk because of its
investment in high-yield securities. 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, the 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.
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 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 each Fund's assets
may be invested in the securities of a limited number of issuers, each 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). Because each 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.
Because the California Intermediate Tax Free Fund and California Tax Free
Fund invest in securities of issuers within the state of California, these Funds
are particularly susceptible to events in California. Although California has a
larger and more diverse economy than most other states, its economy continues to
be driven by, among other industries, agriculture, tourism, housing and
construction, high technology and manufacturing. A downturn in any one industry
may have a disproportionate impact on California municipal securities.
Similarly, because Colorado Intermediate Tax Free Fund and Colorado Tax Free
Fund invest in securities of issuers within the state of Colorado, these Funds
are particularly susceptible to events in Colorado. The Colorado economy is
based on information, professional and technical services, communications,
transportation, tourism, natural resources and mining, and manufacturing.
Certain obligations of Colorado state and local public entities are subject to
particular economic risks, including, but not limited to, the vulnerabilities of
resort economies which depend on seasonal tourism, the possibility of downturns
in sales tax and other revenues, and fluctuations in the real estate market.
Because the Acquiring Funds generally invest in debt securities with longer
maturities than the Acquired Funds, the Acquiring Funds may be more sensitive to
interest rate changes. More detailed information about the risks of investing in
California and Colorado is contained in the Funds' SAI.
ADDITIONAL INFORMATION ABOUT THE FUNDS
DISTRIBUTION OF SHARES
The distribution arrangements applicable to the Class A and Class Y shares
of each Acquired Fund are identical to the distribution arrangements applicable
to the Class A and Class Y shares, respectively, of its corresponding Acquiring
Fund. Quasar Distributors, LLC (the "Distributor") serves as the distributor for
the Funds' shares pursuant to a Distribution Agreement with FAIF dated July 1,
2007 (the "Distribution Agreement"). The Distributor is a wholly owned
subsidiary of U.S. Bancorp. The Distributor receives any front-end sales charges
or contingent deferred sales charges paid in connection with the purchase or
sale of Fund shares, as disclosed above under "Summary - Comparison of Fund
Expenses," and any fees paid by the Funds pursuant to Rule 12b-1 under the 1940
Act ("Rule 12b-1").
15
FAIF has adopted a Distribution Plan pursuant to Rule 12b-1 (the
"Distribution Plan") which applies to the Class A shares of the Acquired Funds
and the Acquiring Funds. Under the Distribution Plan, each Fund pays to the
Distributor a shareholder servicing fee at an annual rate of 0.25% of the
average daily net assets of the Fund's Class A shares. The Distributor uses
these fees 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. The Distributor
begins to pay shareholder servicing fees to intermediaries immediately after a
shareholder purchases shares and the intermediaries continue to receive these
fees for as long as the shareholder holds the shares
The Distributor receives no sales charges or Rule 12b-1 fees for
distribution of the Class Y shares.
In addition to the Rule 12b-1 fees paid by the Funds, the Advisor and/or
the Distributor may pay additional compensation to financial intermediaries out
of their own legitimate profits 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 Fund to an investor. These
payments are not reflected in the fees and expenses listed above under "Summary
- Comparison of Fund Expenses" because they are not paid by the Funds.
For more complete information concerning the distribution arrangements
applicable to the Funds, including applicable fees and expenses, please see the
Acquiring Funds' prospectus, which accompanies this Proxy Statement/Prospectus,
the Acquired Funds' prospectus, and the Funds' SAI. For a copy of the Acquired
Funds' prospectus or the Funds' SAI, which are incorporated by reference herein,
call Investor Services at (800) 677-3863.
PURCHASE AND REDEMPTION PROCEDURES AND EXCHANGE PRIVILEGES
The purchase and redemption procedures for each Acquired Fund are identical
to those of the corresponding Acquiring Fund except that, as noted above under
"Summary - Comparison of Fund Expenses," Class A share front-end sales charges
are higher for the Acquiring Funds.
Shares of the Funds may be purchased or redeemed on any day when the New
York Stock Exchange is open, except that shares cannot be purchased by wire
transfer on days that federally chartered banks are closed. The purchase or
redemption price for Fund shares will be based on that day's net asset value per
share if the order is received in proper form by the Funds, or an investment
professional or financial institution authorized to accept orders on the Funds'
behalf, prior to the time the Funds calculate their net asset values. Purchases
of Class A shares are made at net asset value plus a front-end sales charge,
which is reduced for larger purchases. There is no front-end sales charge on
Class A share purchases of $1 million or more, but shareholders may be assessed
a contingent deferred sales charge ("CDSC") of 1% if they sell their shares
within 18 months. Class Y shares of the Acquired Funds and the Acquiring Funds
are sold at their net asset value per share without either a front-end sales
charge or a CDSC.
Exchange privileges for each Acquired Fund are identical to those of the
corresponding Acquiring Fund. Shares of the Funds generally may be exchanged for
the same class of shares in any other First American Fund, with certain
exceptions, including:
- Class A shares may be exchanged for Class Y shares of the same Fund or
another First American Fund if the shareholder subsequently becomes
eligible to purchase Class Y shares.
16
- If a shareholder is no longer eligible to hold Class Y shares, the
shareholder may exchange those 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 Class A shares of a Fund are exchanged for Class
A shares of another First American Fund, there is no front-end sales charge.
A Fund may change or cancel its exchange policies at any time. The Funds
have the right to limit exchanges that are deemed to constitute short-term
trading.
For more complete information concerning purchase and redemption procedures
and exchange privileges, please see the Acquiring Funds' Prospectus, which
accompanies this Proxy Statement/Prospectus, the Acquired Funds' Prospectus, and
the Funds' SAI. For a copy of the Acquired Funds' Prospectus or the Funds' SAI,
which are incorporated by reference herein, call Investor Services at (800)
677-3863.
DIVIDENDS AND OTHER DISTRIBUTIONS; TAXES
The Funds' policies regarding dividends and other distributions are
identical. Dividends from each Fund's net investment income are declared daily
and paid monthly. Any capital gains are distributed at least once each year.
Dividends are reinvested in additional shares of the same Fund, unless the
shareholder requests that distributions be reinvested in another First American
Fund or paid in cash.
TAXES
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.
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.
If, in redeeming 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.
17
State Taxes on Distributions.
California Income Taxation. California Intermediate Tax Free Fund and
California Tax Free Fund each 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 a 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 and 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.
INFORMATION ABOUT THE REORGANIZATIONS
AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions under which the proposed Reorganizations will be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, the form of which is
attached as Appendix A to this Prospectus/Proxy Statement.
The Reorganization Plan provides, with respect to each Reorganization, for
(a) the Acquiring Fund's acquisition, as of the close of business on the date of
the closing of the Reorganization or other time FAIF determines (the "Effective
Time"), of all the assets of the corresponding Acquired Fund in exchange solely
for Acquiring Fund shares and the Acquiring Fund's assumption of all the
Acquired Fund's liabilities and (b) the distribution of those shares, by class,
to the Acquired Fund's shareholders.
An Acquired Fund's assets to be acquired by its corresponding Acquiring
Fund include all cash, cash equivalents, securities, receivables, claims and
rights of action, rights to register shares under applicable securities laws,
books and records, deferred and prepaid expenses shown as assets on the Acquired
Fund's books, and other property the Acquired Fund owns at the Effective Time.
An Acquiring Fund will assume from its corresponding Acquired Fund all its
liabilities, debts, obligations and duties of whatever kind or nature; provided,
however, that each Acquired Fund will use its best efforts to discharge all its
known liabilities before the Effective Time.
The value of each Acquired Fund's assets to be acquired by its
corresponding Acquiring Fund and the net asset value ("NAV") per share of each
class of the Acquiring Fund shares to be exchanged for those assets will be
determined as of the close of regular trading on the New York Stock Exchange on
the date of the Reorganization closing, using the valuation procedures described
in the Funds' prospectuses and the SAI. Each Acquired Fund's net value will be
the value of its assets as so determined, less the amount of its liabilities
determined as of the close of such trading.
At, or as soon as practicable after, the Effective Time, each Acquired Fund
will distribute, by class, the Acquiring Fund shares it receives in a
Reorganization pro rata to its shareholders of record as of the Effective Time,
so that each shareholder will receive a number of full and fractional Acquiring
18
Fund shares of the same class that is equal in aggregate value to the
shareholder's Acquired Fund shares. The shares will be distributed by opening
accounts on the Acquiring Fund's books in the names of the shareholders and by
transferring to those accounts the shares previously credited to the Acquired
Fund's account on those books. Fractional Acquiring Fund shares will be rounded
to the third decimal place. Each Acquired Fund will be terminated as soon as
practicable after the share distribution.
Because Acquiring Fund shares will be issued at their NAV in exchange for
the net assets of the corresponding Acquired Fund, the aggregate value of the
Acquiring Fund shares issued to shareholders in a Reorganization will equal the
aggregate value of the Acquired Fund shares they surrender. The NAV per share of
each class of each Acquiring Fund will be unchanged by a Reorganization. Thus,
the Reorganizations will not result in dilution of any shareholder's interest.
If Class A Acquiring Fund shares are issued in a Reorganization to
shareholders that formerly held Class A Acquired Fund shares with respect to
which the front-end sales charge was waived due to a purchase of $1 million or
more, then, in determining whether a deferred sales charge is payable on the
sale of those Class A Acquiring Fund shares, the Acquiring Fund will give the
holder thereof credit for the period during which the holder held those Acquired
Fund shares.
Any transfer taxes payable on the issuance of Acquiring Fund shares in a
name other than that of the registered shareholder will be paid by the person to
whom those shares are to be issued as a condition of the transfer. Any reporting
responsibility of an Acquired Fund to a public authority will continue to be its
responsibility until it is dissolved.
The Advisor will bear the entire cost of the Reorganizations, including
professional fees and the cost of soliciting proxies for the Meeting, which
principally consists of printing and mailing expenses, and the cost of any
supplementary solicitation.
In approving the Reorganization Plan, the Board of Directors reviewed
various factors about the Funds and each Reorganization. The Board considered
the relative size of the Funds as well as the similarity of the Funds'
investment objectives and principal investment strategies. The Board evaluated
the potential economies of scale associated with larger mutual funds and
concluded that operating efficiencies may be achieved by combining the Funds.
The Board also considered the performance history of each Fund and the relative
expenses of the Funds. After such consideration, the Board concluded that each
Reorganization would be in the best interests of the Funds participating
therein.
The consummation of each Reorganization is subject to a number of
conditions set forth in the Reorganization Plan (not including consummation of
any other Reorganization), some of which may be waived by FAIF. FAIF may amend
the Reorganization Plan in any manner, except that no amendment may be made
subsequent to the Meeting that has a material adverse effect on the interests of
an Acquired Fund's shareholders. In addition, FAIF's Bylaws and Articles of
Incorporation as a mechanical matter require an amendment to FAIF's Articles of
Incorporation in order for the proposed Reorganizations to be effected.
REASONS FOR THE REORGANIZATIONS
The Board of Directors considered and unanimously approved each
Reorganization at an in-person meeting held on September 23-25, 2008. In
approving the Reorganizations, the Board, which is composed solely of
Independent Directors, determined that each Reorganization is in the best
interests of the participating Funds' shareholders and that the interests of
each Fund's shareholders will not be diluted as a result of the Reorganizations.
In approving the Reorganizations, the Board considered a number of factors,
including the following:
19
- The compatibility of the Funds' investment objectives and strategies:
The Board considered that each Acquired Fund has an investment
objective that is substantially similar to that of its corresponding
Acquiring Fund, and the investment strategies of each Acquired Fund
differ from those of its corresponding Acquiring Fund only with
respect to the average maturity of the securities which the Funds
hold.
- The Funds' relative risks: The Board noted that the Acquired Funds and
Acquiring Funds are generally subject to the same risks except that
the longer-term securities in which the Acquiring Funds invest are
generally more sensitive to interest rate changes.
- The Funds' investment performance: The Board considered that the
Acquired Funds have better performance for the one-year period ended
June 30, 2008, reflecting a more favorable interest rate environment
for shorter-maturity funds, but the Acquiring Funds have comparable or
better performance for the three- and five-year periods ended June 30,
2008.
- The Funds' relative sizes: The Board noted that the Acquired Funds and
the Acquiring Funds are all fairly small, and combining the Funds
should provide larger funds which potentially can be more efficiently
managed. The Board also noted that combining the Funds will reduce
duplicative expenses (i.e., audit fees, annual and semi-annual
shareholder reports, blue sky fees, etc.), and shareholders may
benefit from other economies of scale often associated with larger
funds. Finally, although each Acquired Fund is somewhat larger than
its corresponding Acquiring Fund, the Board considered the Advisor's
assertion that California and Colorado long-term tax free funds
represent larger asset classes than California and Colorado
intermediate-term tax free funds, respectively, and that these larger
asset classes historically have had greater asset flows, offering the
longer-maturity Acquiring Funds more potential for asset growth.
- The Funds' relative expenses: The Board noted that each Acquired Fund
has the same contractual investment advisory fees as its corresponding
Acquiring Fund. The Board also considered that, although the total
expenses of the Acquiring Funds, before expense waivers, are higher
than those of the Acquired Funds, primarily because of the smaller
size of the Acquiring Funds, each Acquiring Fund has lower total
expenses than its corresponding Acquired Fund after fee waivers and
expense reimbursements by the Advisor. Finally, the Board considered
that the Advisor had contractually agreed to maintain the Acquiring
Funds' total expense ratios at their current levels through at least
June 30, 2009.(Subsequent to the meeting of the Board, the Advisor
contractually agreed to further maintain the Acquiring Funds' total
expense ratios at their current levels through at least October 31,
2009.)
- The portfolio composition of the Funds: The Board noted that all
securities held by the Acquired Fund are eligible for investment by
the Acquiring Fund.
- The tax consequences of the Reorganization: The Board noted that each
Reorganization is expected to be tax-free to shareholders of the
participating Funds, which it believes is in their best interests.
- The investment experience, expertise, and results of each Fund's
portfolio managers: The Board noted that each Acquired Fund is managed
by the same portfolio managers as its corresponding Acquiring Fund,
and considered the investment experience, expertise, and results of
these portfolio managers.
- The effect of the Reorganization on each Fund's shareholders' rights:
The Board considered that the Acquired Funds, shareholders will
receive Acquiring Funds shares of the same class that they hold in the
Acquired Fund. The Board noted that the rights of the shareholders of
the Funds are identical.
- Expenses of the Reorganization: The Board considered that the Advisor
has agreed to pay the expenses associated with the Reorganizations,
including the expenses of preparing, filing,
20
printing, and mailing this Prospectus/Proxy Statement and of holding
the Meeting, so that no shareholders of any Fund will effectively bear
these expenses.
- The alternatives to the Reorganizations: The Board could have decided
to continue the Acquired Funds in their present form, but believed
this was not in shareholders' best interests given the small size of
the Funds and resulting high expenses (before expense waivers), and
the limited prospects for growth given the small asset class sizes of
California and Colorado intermediate-term tax free funds. As an
alternative, the Board could have decided to liquidate the Acquired
Funds, but believed this was not in shareholders' best interests since
liquidating the Acquired Funds would be a taxable event to
shareholders.
- The potential benefits of the Reorganization to the Advisor and its
affiliates: The Board recognized that the Advisor may benefit from the
Reorganization. To the extent that the Acquiring Funds realize
economies of scale, the Advisor may spend less in connection with fee
waivers following the Reorganizations than it does today. The Board
also noted, however, that the Advisor is not obligated to make any
such waivers (beyond the contractual period) and that, in any event,
the proposed Reorganizations are expected to provide benefits to
shareholders.
The Board did not assign specific weights to any or all of these factors in
determining which fund should survive, nor was the outcome of a certain factor
more favorable to that determination than its converse. Rather, the Board
compared all of the factors in determining, in the exercise of its business
judgment, to approve the Reorganizations and to recommend the approval by each
Acquired Fund's shareholders.
DESCRIPTION OF SECURITIES TO BE ISSUED
FAIF is registered with the SEC as an open-end management investment
company. Fund shares entitle their holders to one vote per full share and
fractional votes for fractional shares held. Each Acquiring Fund currently has
Class A, Class C and Class Y shares outstanding. Each Acquired Fund currently
has Class A and Class Y shares outstanding. If the Reorganization Plan is
approved with respect to an Acquired Fund, each shareholder thereof will receive
Acquiring Fund shares of the same class as their Acquired Fund shares and having
a net asset value equal to the total net asset value of their Acquired Fund
shares.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of an Acquired Fund's assets for shares of its corresponding
Acquiring Fund and the Acquiring Fund's assumption of that Acquired Fund's
liabilities, and the subsequent distribution of those shares, is intended to
qualify for federal income tax purposes as a tax-free reorganization under
section 368(a)(1) of the Code. FAIF will receive a tax opinion from Dorsey &
Whitney LLP substantially to the effect that, with respect to each
Reorganization:
(1) the Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1) of the Code, and the Acquired Fund and the
Acquiring Fund each will qualify as a party to the Reorganization
under Section 368(b) of the Code;
(2) Acquired Fund shareholders will recognize no income, gain or loss upon
receipt, pursuant to the Reorganization, of shares of the Acquiring
Fund. Acquired Fund shareholders subject to taxation will recognize
income upon receipt of any net investment income not constituting
exempt interest dividends or any net capital gains of the Acquired
Fund which are distributed by the Acquired Fund prior to the Effective
Time;
(3) the tax basis of Acquiring Fund shares received by each Acquired Fund
shareholder pursuant to the Reorganization will be equal to the tax
basis of Acquired Fund shares exchanged therefor;
21
(4) the holding period of Acquiring Fund shares received by each Acquired
Fund shareholder pursuant to the Reorganization will include the
period during which each Acquired Fund shareholder held Acquired Fund
shares exchanged therefor, provided that the Acquired Fund shares were
held as a capital asset at the Effective Time;
(5) the Acquired Fund will recognize no income, gain or loss by reason of
the Reorganization;
(6) the Acquiring Fund will recognize no income, gain or loss by reason of
the Reorganization;
(7) the tax basis of the assets received by the Acquiring Fund pursuant to
the Reorganization will be the same as the basis of those assets in
the hands of the Acquired Fund as of the Effective Time;
(8) the holding period of the assets received by the Acquiring Fund
pursuant to the Reorganization will include the period during which
such assets were held by the Acquired Fund; and
(9) the Acquiring Fund will succeed to and take into account the earnings
and profits, or deficit in earnings and profits, of the Acquired Fund
as of the Effective Time.
The tax opinion will state that no opinion is expressed as to the effect of
the Reorganization on the Funds or any shareholder with respect to any asset as
to which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
An Acquiring Fund's utilization after a Reorganization of (1) carryovers of
pre-Reorganization capital losses realized by its corresponding Acquired Fund
and (2) capital losses it realizes after the Reorganization that are
attributable to that Acquired Fund's built-in unrealized capital losses as of
the Effective Time will be subject to limitation under the Code. In addition,
the ability of certain Acquiring Funds to use a corresponding Acquired Fund's
capital loss carryovers within the succeeding five years may be limited to the
Acquiring Fund's net asset value at the time of the reorganization multiplied by
the long-term tax exempt rate.
Acquired Fund shareholders should consult their tax advisors regarding the
effect, if any, of the Reorganizations in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganizations, those shareholders also should
consult their tax advisors about state and local tax consequences, if any, of
the Reorganizations.
CAPITALIZATION
The following tables set forth the capitalization of each Acquired Fund and
the corresponding Acquiring Fund, and the capitalization of the combined
Acquiring Fund on a pro forma basis, as of June 30, 2008, giving effect to the
proposed acquisition of assets of the Acquired Fund at its then current net
asset value.
22
CAPITALIZATION OF CALIFORNIA INTERMEDIATE TAX FREE FUND,
CALIFORNIA TAX FREE FUND AND UNAUDITED PRO FORMA COMBINED
CALIFORNIA TAX FREE FUND
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
CALIFORNIA PRO FORMA -
INTERMEDIATE CALIFORNIA TAX CALIFORNIA
TAX FREE FUND FREE FUND TAX FREE FUND
------------- -------------- -------------
NET ASSETS
Class A $ 4,463 $12,076 $ 16,539
Class C N/A $ 2,480 $ 2,480
Class Y $52,924 $30,485 $ 83,409
TOTAL $57,387 $45,041 $102,428
SHARES OUTSTANDING
Class A 447 1,128 1,545
Class C N/A 231 231
Class Y 5,284 2,847 7,789
NET ASSET VALUE PER
SHARE
Class A $ 9.99 $ 10.71 $ 10.71
Class C N/A $ 10.72 $ 10.72
Class Y $ 10.02 $ 10.71 $ 10.71
CAPITALIZATION OF COLORADO INTERMEDIATE TAX FREE FUND,
COLORADO TAX FREE FUND AND UNAUDITED PRO FORMA COMBINED COLORADO TAX FREE FUND
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
COLORADO PRO FORMA -
INTERMEDIATE COLORADO TAX COLORADO
TAX FREE FUND FREE FUND TAX FREE FUND
------------- -------------- -------------
NET ASSETS
Class A $ 6,199 $ 5,815 $12,014
Class C N/A $ 2,859 $ 2,859
Class Y $43,933 $15,889 $59,822
TOTAL $50,132 $24,563 $74,695
23
SHARES OUTSTANDING
Class A 609 566 1,169
Class C N/A 279 279
Class Y 4,324 1,543 5,812
NET ASSET VALUE PER
SHARE
Class A $ 10.19 $ 10.28 $ 10.28
Class C N/A $ 10.26 $ 10.26
Class Y $ 10.16 $ 10.29 $ 10.29
24
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
(EXCERPTED FROM THE FUNDS' ANNUAL REPORTS FOR THE FISCAL YEAR ENDED JUNE 30,
2008)
California Intermediate Tax Free Fund
Investment Objective: providing current income that is exempt from both federal
income tax and California state income tax to the extent consistent with
preservation of capital
HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED JUNE 30, 2008?
The First American California Intermediate Tax Free Fund (the "fund"), Class Y
shares, returned 3.33% for the fiscal year ended June 30, 2008 (Class A shares
returned 3.20%, without taking the sales charge into account, for the same
period). By comparison, the fund's benchmark, the Lehman 7-Year Municipal Bond
Index*, returned 5.60%. Performance for the fund's peer group, the Lipper
California Intermediate Municipal Debt Funds Average, was 2.59%.
WHAT WERE THE GENERAL MUNICIPAL MARKET CONDITIONS DURING THE FISCAL YEAR?
The municipal market endured one of its more tumultuous years ever as fallout
from the housing debacle rocked market participants. Deterioration within their
relatively new mortgage-backed book of business ultimately led to downgrades for
several of the major monoline municipal bond insurers. The impaired credit
quality and loss of confidence in many of the insurers affected much of the
municipal market (use of insurance had become so pervasive that in recent years
close to 50% of all new issuance came to market with an insurance wrap). The
market was buffeted by irregular bouts of volatility and selling pressure as a
number of accounts unwound positions. For example, tax-exempt money funds were
forced to exit insured holdings en masse due to minimum ratings and liquidity
requirements. To reduce debt, many municipal market investors were pressured to
sell longer-maturity bonds when the floating-rate component of their borrowing
programs was no longer money-fund eligible (the municipal market had in recent
years developed its own form of "carry" trade, in which investors borrow in the
short-term money markets and invest in longer maturities, trying to take
advantage of the relative steepness of the municipal yield curve in comparison
to other fixed-income markets).
Credit spreads (i.e., the differences in yield between higher- and lower-quality
debt) were the first to widen as the market anticipated that lower-quality debt
would struggle in a slowing economy. Ultimately, however, the insurer debacle
cut an even wider swath through the market. Many insured bonds now trade solely
based on the creditworthiness of underlying obligors with little or no value
attributed to the insurance wrap. Not surprisingly, in this environment natural
standalone (i.e., without an insurance wrap) AAA- and AA-rated bonds were
generally the best performers for the year.
The municipal yield curve steepened over the past 12 months as yields on shorter
maturities fell while longer maturity yields rose slightly. In terms of total
return, intermediate maturities generally produced the best returns and
longer-maturity bonds were the weakest-performing part of the curve. Although
the overall municipal market started to regain its bearings near the end of the
fiscal year, high-grade bonds still finished at yields of more than 90% (and in
some cases more than 100%) of comparable-maturity Treasuries, which typically
indicates that the high-grade bonds represent good value relative to Treasuries.
HOW DID MARKET CONDITIONS AND INVESTMENT STRATEGIES AFFECT THE FUND'S
PERFORMANCE?
Reflecting the trends in the broader market, the fund's holdings in lower-grade
securities underperformed for the fiscal year. The best-performing bonds in the
fund were generally the natural high-grades (AAA- and AA-rated bonds), which
were not affected by the insurer debacle, and shorter intermediate maturities,
which benefited from the flattening yield curve over the course of the year. The
fund's holdings in lower-grade securities were generally short in maturity and
somewhat less volatile in nature, and therefore were not a major detriment to
performance. Although the fund's duration (a measure of its sensitivity to
interest-rate movements) was somewhat longer than the benchmark's for most of
the fiscal year, the fund posted solid total return numbers relative to its peer
group.
WHAT STRATEGIC MOVES WERE MADE BY THE FUND AND WHY?
The fund's duration was slightly longer than the benchmark duration most of the
past year, due in part to the relatively steeper slope of the California yield
curve. Given the turmoil in the marketplace and the resultant supply pressures,
the fund added to weightings in a variety of issuers and sectors (such as
healthcare and education) at wider credit spreads - and, therefore, lower prices
- than have been available for a number of years. Since we anticipate the shape
of the municipal yield curve to flatten over time, we focused many purchases in
the 10- to 15-plus-year range and reallocated out of shorter-maturity ranges
while keeping duration constant by adjusting the fund's cash reserves.
* Unlike mutual funds, index returns do not reflect any expenses, transaction
costs, or cash flow effects.
PORTFOLIO ALLOCATION AS OF JUNE 30, 2008(1) (% OF NET ASSETS)
Revenue Bonds(3) 69.8%
General Obligations(3) 19.4
Certificates of Participation(3) 3.6
Short-Term Investment 6.1
Other Assets and Liabilities, Net(4) 1.1
-----
100.0%
=====
BOND CREDIT QUALITY DISTRIBUTION AS OF JUNE 30, 2008(2) (% OF MARKET VALUE)
AAA 7.0%
AA 23.0
A 45.0
BBB 22.9
BB 0.8
Non-Rated 1.3
-----
100.0%
=====
(1) Portfolio allocations are subject to change and are not recommendations to
buy or sell any security.
(2) Individual security ratings are based on information from Moody's Investors
Service, Standard & Poor's, and/or Fitch. If there are multiple ratings for
a security, the lowest rating is used unless ratings are provided by all
three agencies, in which case the middle rating is used.
(3) These securities may include bonds that are pre-refunded or escrowed to
maturity issues; see the fund's Schedule of Investments. As of June 30,
2008, 7.4% of the fund's net assets were pre-refunded and escrowed to
maturity issues.
(4) Investments typically comprise substantially all of the fund's net assets.
Other assets and liabilities include receivables for items such as income
earned but not yet received and payables for items such as fund expenses
incurred but not yet paid.
ANNUAL PERFORMANCE(1,2) AS OF JUNE 30, 2008
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
AVERAGE ANNUAL RETURN WITH SALES CHARGE (POP)
Class A 0.90% 2.33% 3.93%
AVERAGE ANNUAL RETURN WITHOUT SALES CHARGE (NAV)
Class A 3.20% 2.80% 4.17%
Class Y 3.33% 2.95% 4.28%
Lehman 7-Year Municipal Bond Index(3) 5.60% 3.24% 4.80%
THE PERFORMANCE DATA QUOTED ON THIS PAGE REPRESENTS PAST PERFORMANCE AND DOES
NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE OF THE FUND MAY
BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO
THE MOST RECENT MONTH-END MAY BE OBTAINED BY CALLING 800.677.FUND.
(1) TOTAL RETURNS AT NET ASSET VALUE ("NAV") REFLECT PERFORMANCE OVER THE TIME
PERIOD INDICATED WITHOUT INCLUDING THE FUND'S MAXIMUM SALES CHARGE AND
ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
TOTAL RETURNS AT PUBLIC OFFERING PRICE ("POP") REFLECT PERFORMANCE OVER THE
TIME PERIOD INDICATED INCLUDING MAXIMUM SALES CHARGES OF 2.25% FOR CLASS A
SHARES. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
INVESTMENTS IN DEBT SECURITIES TYPICALLY DECREASE IN VALUE WHEN INTEREST
RATES RISE. THE RISK IS USUALLY GREATER FOR LONGER-TERM DEBT SECURITIES.
AS OF THE MOST RECENT PROSPECTUS, THE FUND'S TOTAL ANNUAL OPERATING EXPENSE
RATIO FOR CLASS A AND CLASS Y SHARES WAS 1.25% AND 1.00%, RESPECTIVELY. THE
ADVISOR HAS CONTRACTUALLY AGREED TO WAIVE FEES AND REIMBURSE OTHER FUND
EXPENSES THROUGH AT LEAST JUNE 30, 2009 SO THAT TOTAL ANNUAL FUND OPERATING
EXPENSES FOR CLASS A AND CLASS Y SHARES DO NOT EXCEED 0.70% AND 0.70%,
RESPECTIVELY. THESE FEE WAIVERS AND EXPENSE REIMBURSEMENTS MAY BE
TERMINATED AT ANY TIME AFTER JUNE 30, 2009, AT THE DISCRETION OF THE
ADVISOR. PRIOR TO THAT TIME, SUCH WAIVERS AND REIMBURSEMENTS MAY NOT BE
TERMINATED WITHOUT THE APPROVAL OF THE FUND'S BOARD OF DIRECTORS.
VALUE OF $10,000 INVESTMENT(1,2,4) AS OF JUNE 30, 2008
California Intermediate Tax Free Fund, Class A (NAV) $15,039
California Intermediate Tax Free Fund, Class A (POP) $14,704
Lehman 7-Year Municipal Bond Index(3) $15,986
The chart at right illustrates the total value of an assumed $10,000 investment
in the fund's Class A shares (from 6/30/1998 to 6/30/2008) as compared to the
Lehman 7-Year Municipal Bond Index(3)
(PERFORMANCE GRAPH)
(2) Performance does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or redemption of fund shares. Investment
performance reflects fee waivers that are or were in effect. In the absence
of such fee waivers, total returns would be reduced. Index performance is
for illustrative purposes only and does not reflect any expenses,
transaction costs, or cash flow effects. Direct investment in the index is
not available.
A portion of the fund's income may be subject to state and/or federal
income tax, including the alternative minimum tax. Capital gains
distributions, if any, will be subject to tax.
(3) An unmanaged index comprised of fixed-rate, investment-grade tax-exempt
bonds with remaining maturities between six and eight years.
(4) Performance for Class Y shares is not presented. Performance for this class
will vary due to a different expense structure.
California Tax Free Fund
Investment Objective: 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
HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED JUNE 30, 2008?
The First American California Tax Free Fund (the "fund"), Class Y shares,
returned 2.28% for the fiscal year ended June 30, 2008 (Class A shares returned
2.11%, without taking the sales charge into account, for the same period). By
comparison, the fund's benchmark, the Lehman Municipal Bond Index*, returned
3.23%. Performance for the fund's peer group, the Lipper California Municipal
Debt Funds Average, was -0.54%.
WHAT WERE THE GENERAL MUNICIPAL MARKET CONDITIONS DURING THE FISCAL YEAR?
The municipal market endured one of its more tumultuous years ever as fallout
from the housing debacle rocked market participants. Deterioration within their
relatively new mortgage-backed book of business ultimately led to downgrades for
several of the major monoline municipal bond insurers. The impaired credit
quality and loss of confidence in many of the insurers affected much of the
municipal market (use of insurance had become so pervasive that in recent years
close to 50% of all new issuance came to market with an insurance wrap). The
market was buffeted by irregular bouts of volatility and selling pressure as a
number of accounts unwound positions. For example, tax-exempt money funds were
forced to exit insured holdings en masse due to minimum ratings and liquidity
requirements. To reduce debt, many municipal market investors were pressured to
sell longer-maturity bonds when the floating-rate component of their borrowing
programs was no longer money-fund eligible (the municipal market had in recent
years developed its own form of "carry" trade, in which investors borrow in the
short-term money markets and invest in longer maturities, trying to take
advantage of the relative steepness of the municipal yield curve in comparison
to other fixed-income markets).
Credit spreads (i.e., the differences in yield between higher- and lower-quality
debt) were the first to widen as the market anticipated that lower-quality debt
would struggle in a slowing economy. Ultimately, however, the insurer debacle
cut an even wider swath through the market. Many insured bonds now trade solely
based on the creditworthiness of underlying obligors with little or no value
attributed to the insurance wrap. Not surprisingly, in this environment natural
standalone (i.e., without an insurance wrap) AAA- and AA-rated bonds were
generally the best performers for the year.
The municipal yield curve steepened over the past 12 months as yields on shorter
maturities fell while longer maturity yields rose slightly. In terms of total
return, intermediate maturities generally produced the best returns and
longer-maturity bonds were the weakest-performing part of the curve. Although
the overall municipal market started to regain its bearings near the end of the
fiscal year, high-grade bonds still finished at yields of more than 90% (and in
some cases more than 100%) of comparable-maturity Treasuries, which typically
indicates that the high-grade bonds represent good value relative to Treasuries.
HOW DID MARKET CONDITIONS AND INVESTMENT STRATEGIES AFFECT THE FUND'S
PERFORMANCE?
Reflecting the trends in the broader market, the fund's holdings in lower-grade
securities generally had a negative effect on performance. The best-performing
bonds in the fund from a quality standpoint were generally the natural
high-grades (AAA- and AA-rated bonds) not affected by either the insurer debacle
or the general widening in yield in lower-grade bonds. The fund also benefited
from not having a high weighting in lower-grade land-based "dirt" bonds (issued
to back new construction projects). The fund's allocations to
intermediate-maturity bonds also helped performance due to the flattening yield
curve and general underperformance of long-maturity (10 years or more) bonds for
the year.
WHAT STRATEGIC MOVES WERE MADE BY THE FUND AND WHY?
The fund did slightly increase its duration (i.e., sensitivity to interest-rate
movements) over the past few months as yields increased to historically high
levels relative to comparable-maturity Treasuries. Since we anticipate the shape
of the municipal yield curve to flatten over time, we reduced some of the
weighting in intermediate maturities in favor of longer bonds. Given the turmoil
throughout the year and the resultant supply pressures, the fund added to
weightings in a variety of issuers and sectors (such as healthcare and
education) at wider credit spreads - and, therefore, lower prices - than have
been available for a number of years.
* Unlike mutual funds, index returns do not reflect any expenses, transaction
costs, or cash flow effects.
PORTFOLIO ALLOCATION AS OF JUNE 30, 2008(1) (% OF NET ASSETS)
Revenue Bonds(3) 67.6%
General Obligations(3) 24.3
Certificates of Participation(3) 4.6
Short-Term Investment 2.6
Other Assets and Liabilities, Net(4) 0.9
-----
100.0%
=====
BOND CREDIT QUALITY DISTRIBUTION AS OF JUNE 30, 2008(2) (% OF MARKET VALUE)
AAA 16.8%
AA 21.4
A 42.0
BBB 17.8
Non-Rated 2.0
-----
100.0%
=====
(1) Portfolio allocations are subject to change and are not recommendations to
buy or sell any security.
(2) Individual security ratings are based on information from Moody's Investors
Service, Standard & Poor's, and/or Fitch. If there are multiple ratings for
a security, the lowest rating is used unless ratings are provided by all
three agencies, in which case the middle rating is used.
(3) These securities may include bonds that are pre-refunded or escrowed to
maturity issues; see the fund's Schedule of Investments. As of June 30,
2008, 12.1% of the fund's net assets were pre-refunded and escrowed to
maturity issues.
(4) Investments typically comprise substantially all of the fund's net assets.
Other assets and liabilities include receivables for items such as income
earned but not yet received and payables for items such as fund expenses
incurred but not yet paid.
ANNUAL PERFORMANCE(1,2) AS OF JUNE 30, 2008
SINCE
INCEPTION
1 YEAR 5 YEARS 2/01/2000
------ ------- ---------
AVERAGE ANNUAL RETURN WITH SALES CHARGE (POP)
Class A (2.25)% 2.22% 5.09%
Class C 0.64% 2.68% 5.21%
AVERAGE ANNUAL RETURN WITHOUT SALES CHARGE (NAV)
Class A 2.11% 3.11% 5.62%
Class C 1.61% 2.68% 5.21%
Class Y 2.28% 3.35% 5.87%
Lehman Municipal Bond Index(3) 3.23% 3.52% 5.71%
THE PERFORMANCE DATA QUOTED ON THIS PAGE REPRESENTS PAST PERFORMANCE AND DOES
NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE OF THE FUND MAY
BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO
THE MOST RECENT MONTH-END MAY BE OBTAINED BY CALLING 800.677.FUND.
(1) TOTAL RETURNS AT NET ASSET VALUE ("NAV") REFLECT PERFORMANCE OVER THE TIME
PERIOD INDICATED WITHOUT INCLUDING THE FUND'S MAXIMUM SALES CHARGE AND
ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
TOTAL RETURNS AT PUBLIC OFFERING PRICE ("POP") REFLECT PERFORMANCE OVER THE
TIME PERIOD INDICATED INCLUDING MAXIMUM SALES CHARGES OF 4.25% FOR CLASS A
SHARES AND THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE ("CDSC") FOR CLASS
C SHARES FOR THE RELEVANT PERIOD. MAXIMUM CDSC IS 1.00% FOR CLASS C SHARES.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
INVESTMENTS IN DEBT SECURITIES TYPICALLY DECREASE IN VALUE WHEN INTEREST
RATES RISE. THE RISK IS USUALLY GREATER FOR LONGER-TERM DEBT SECURITIES.
AS OF THE MOST RECENT PROSPECTUS, THE FUND'S TOTAL ANNUAL OPERATING EXPENSE
RATIO FOR CLASS A, CLASS C, AND CLASS Y SHARES WAS 1.46%, 1.98%, AND 1.21%,
RESPECTIVELY. THE ADVISOR HAS CONTRACTUALLY AGREED TO WAIVE FEES AND
REIMBURSE OTHER FUND EXPENSES THROUGH AT LEAST JUNE 30, 2009 SO THAT TOTAL
ANNUAL FUND OPERATING EXPENSES FOR CLASS A, CLASS C, AND CLASS Y SHARES DO
NOT EXCEED 0.65%, 1.15%, AND 0.50%, RESPECTIVELY. THESE FEE WAIVERS AND
EXPENSE REIMBURSEMENTS MAY BE TERMINATED AT ANY TIME AFTER JUNE 30, 2009,
AT THE DISCRETION OF THE ADVISOR. PRIOR TO THAT TIME, SUCH WAIVERS AND
REIMBURSEMENTS MAY NOT BE TERMINATED WITHOUT THE APPROVAL OF THE FUND'S
BOARD OF DIRECTORS.
VALUE OF $10,000 INVESTMENT(1,2,4) AS OF JUNE 30, 2008
California Tax Free Fund, Class A (NAV) $15,845
California Tax Free Fund, Class A (POP) $15,177
Lehman Municipal Bond Index(3) $15,955
The chart at right illustrates the total value of an assumed $10,000 investment
in the fund's Class A shares (from 2/1/2000 to 6/30/2008) as compared to the
Lehman Municipal Bond Index(3).
(PERFORMANCE GRAPH)
(2) Performance does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or redemption of fund shares. Investment
performance reflects fee waivers that are or were in effect. In the absence
of such fee waivers, total returns would be reduced. Index performance is
for illustrative purposes only and does not reflect any expenses,
transaction costs, or cash flow effects. Direct investment in the index is
not available.
A portion of the fund's income may be subject to state and/or federal
income tax, including the alternative minimum tax. Capital gains
distributions, if any, will be subject to tax.
(3) An unmanaged index comprised of fixed-rate, investment-grade tax-exempt
bonds with remaining maturities of one year or more.
(4) Performance for Class C and Class Y shares is not presented. Performance
for these classes will vary due to different expense structures.
Colorado Intermediate Tax Free Fund
Investment Objective: providing current income that is exempt from both federal
income tax and Colorado state income tax to the extent consistent with
preservation of capital
HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED JUNE 30, 2008?
The First American Colorado Intermediate Tax Free Fund (the "fund"), Class Y
shares, returned 3.20% for the fiscal year ended June 30, 2008 (Class A shares
returned 3.04%, without taking the sales charge into account, for the same
period). By comparison, the fund's benchmark, the Lehman 7-Year Municipal Bond
Index*, returned 5.60%. Performance for the fund's peer group, the Lipper Other
States Intermediate Municipal Debt Funds Average, was 3.02%.
WHAT WERE THE GENERAL MUNICIPAL MARKET CONDITIONS DURING THE FISCAL YEAR?
The municipal market endured one of its more tumultuous years ever as fallout
from the housing debacle rocked market participants. Deterioration within their
relatively new mortgage-backed book of business ultimately led to downgrades for
several of the major monoline municipal bond insurers. The impaired credit
quality and loss of confidence in many of the insurers affected much of the
municipal market (use of insurance had become so pervasive that in recent years
close to 50% of all new issuance came to market with an insurance wrap). The
market was buffeted by irregular bouts of volatility and selling pressure as a
number of accounts unwound positions. For example, tax-exempt money funds were
forced to exit insured holdings en masse due to minimum ratings and liquidity
requirements. To reduce debt, many municipal market investors were pressured to
sell longer-maturity bonds when the floating-rate component of their borrowing
programs was no longer money-fund eligible (the municipal market had in recent
years developed its own form of "carry" trade, in which investors borrow in the
short-term money markets and invest in longer maturities, trying to take
advantage of the relative steepness of the municipal yield curve in comparison
to other fixed-income markets).
Credit spreads (i.e., the differences in yield between higher- and lower-quality
debt) were the first to widen as the market anticipated that lower-quality debt
would struggle in a slowing economy. Ultimately, however, the insurer debacle
cut an even wider swath through the market. Many insured bonds now trade solely
based on the creditworthiness of underlying obligors with little or no value
attributed to the insurance wrap. Not surprisingly, in this environment natural
standalone (i.e., without an insurance wrap) AAA- and AA-rated bonds were
generally the best performers for the year.
The municipal yield curve steepened over the past 12 months as yields on shorter
maturities fell while longer maturity yields rose slightly. In terms of total
return, intermediate maturities generally produced the best returns and
longer-maturity bonds were the weakest-performing part of the curve. Although
the overall municipal market started to regain its bearings near the end of the
fiscal year, high-grade bonds still finished at yields of more than 90% (and in
some cases more than 100%) of comparable-maturity Treasuries, which typically
indicates that the high-grade bonds represent good value relative to Treasuries.
HOW DID MARKET CONDITIONS AND INVESTMENT STRATEGIES AFFECT THE FUND'S
PERFORMANCE?
Reflecting the trends in the broader market, the fund's holdings in lower-grade
securities generally had a negative effect on performance. The best-performing
bonds in the fund from a quality standpoint were generally the natural
high-grades (AAA- and AA-rated) not affected by either the insurer debacle or
the general widening in yield in lower-grade bonds. Although the fund did hold
meaningful positions in mid to lower-grade securities, which generally
underperformed for the year, the fund's performance improved over the first half
of 2008 as credit spreads - and the performance of lower-rated securities -
showed signs of stabilizing while the market focus increasingly shifted toward
the insurer crisis. The entire year, while tumultuous, produced many relative
value opportunities from both a trading and credit perspective that helped
bolster the fund's performance.
WHAT STRATEGIC MOVES WERE MADE BY THE FUND AND WHY?
Since we anticipate the shape of the municipal yield curve to flatten over time,
we focused many purchases in the 10- to 15-plus-year range and reallocated out
of shorter maturity ranges while keeping duration (i.e., the fund's sensitivity
to interest-rate movements) constant by adjusting the fund's cash reserves.
Given the turmoil throughout the year and the resultant supply pressures, the
fund added to weightings in a variety of issuers and revenue bond sectors
(comprised of bonds that are backed by the revenue of specific projects) at
wider credit spreads - and, therefore, lower prices - than have been available
for a number of years. On a security-specific basis, the fund also sold a number
of positions where we anticipated credit stress was not fully reflected in
realized prices.
* Unlike mutual funds, index returns do not reflect any expenses, transaction
costs, or cash flow effects.
PORTFOLIO ALLOCATION AS OF JUNE 30, 2008(1) (% OF NET ASSETS)
Revenue Bonds(3) 76.2%
General Obligations(3) 19.5
Certificates of Participation(3) 3.1
Short-Term Investment 1.8
Other Assets and Liabilities, Net(4) (0.6)
-----
100.0%
=====
BOND CREDIT QUALITY DISTRIBUTION AS OF JUNE 30, 2008(2) (% OF MARKET VALUE)
AAA 14.2%
AA 26.6
A 28.8
BBB 20.1
Non-Rated 10.3
-----
100.0%
=====
(1) Portfolio allocations are subject to change and are not recommendations to
buy or sell any security.
(2) Individual security ratings are based on information from Moody's Investors
Service, Standard & Poor's, and/or Fitch. If there are multiple ratings for
a security, the lowest rating is used unless ratings are provided by all
three agencies, in which case the middle rating is used.
(3) These securities may include bonds that are pre-refunded or escrowed to
maturity issues; see the fund's Notes to Schedule of Investments. As of
June 30, 2008, 19.0% of the fund's net assets were pre-refunded and
escrowed to maturity issues.
(4) Investments typically comprise substantially all of the fund's net assets.
Other assets and liabilities include receivables for items such as income
earned but not yet received and payables for items such as fund expenses
incurred but not yet paid.
ANNUAL PERFORMANCE(1,2) AS OF JUNE 30, 2008
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
AVERAGE ANNUAL RETURN WITH SALES CHARGE (POP)
Class A 0.70% 2.12% 3.77%
AVERAGE ANNUAL RETURN WITHOUT SALES CHARGE (NAV)
Class A 3.04% 2.59% 4.01%
Class Y 3.20% 2.73% 4.10%
Lehman 7-Year Municipal Bond Index(3) 5.60% 3.24% 4.80%
THE PERFORMANCE DATA QUOTED ON THIS PAGE REPRESENTS PAST PERFORMANCE AND DOES
NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE OF THE FUND MAY
BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO
THE MOST RECENT MONTH-END MAY BE OBTAINED BY CALLING 800.677.FUND.
(1) TOTAL RETURNS AT NET ASSET VALUE ("NAV") REFLECT PERFORMANCE OVER THE TIME
PERIOD INDICATED WITHOUT INCLUDING THE FUND'S MAXIMUM SALES CHARGE AND
ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
TOTAL RETURNS AT PUBLIC OFFERING PRICE ("POP") REFLECT PERFORMANCE OVER THE
TIME PERIOD INDICATED INCLUDING MAXIMUM SALES CHARGES OF 2.25% FOR CLASS A
SHARES. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
INVESTMENTS IN DEBT SECURITIES TYPICALLY DECREASE IN VALUE WHEN INTEREST
RATES RISE. THE RISK IS USUALLY GREATER FOR LONGER-TERM DEBT SECURITIES.
AS OF THE MOST RECENT PROSPECTUS, THE FUND'S TOTAL ANNUAL OPERATING EXPENSE
RATIO FOR CLASS A AND CLASS Y SHARES WAS 1.36% AND 1.11%, RESPECTIVELY. THE
ADVISOR HAS CONTRACTUALLY AGREED TO WAIVE FEES AND REIMBURSE OTHER FUND
EXPENSES THROUGH AT LEAST JUNE 30, 2009 SO THAT TOTAL ANNUAL FUND OPERATING
EXPENSES FOR CLASS A AND CLASS Y SHARES DO NOT EXCEED 0.85% AND 0.70%,
RESPECTIVELY. THESE FEE WAIVERS AND EXPENSE REIMBURSEMENTS MAY BE
TERMINATED AT ANY TIME AFTER JUNE 30, 2009, AT THE DISCRETION OF THE
ADVISOR. PRIOR TO THAT TIME, SUCH WAIVERS AND REIMBURSEMENTS MAY NOT BE
TERMINATED WITHOUT THE APPROVAL OF THE FUND'S BOARD OF DIRECTORS.
VALUE OF $10,000 INVESTMENT(1,2,4) AS OF JUNE 30, 2008
Colorado Intermediate Tax Free Fund, Class A (NAV) $14,811
Colorado Intermediate Tax Free Fund, Class A (POP) $14,472
Lehman 7-Year Municipal Bond Index(3) $15,986
The chart at right illustrates the total value of an assumed $10,000 investment
in the fund's Class A shares (from 6/30/1998 to 6/30/2008) as compared to the
Lehman 7-Year Municipal Bond Index(3).
(PERFORMANCE GRAPH)
(2) Performance does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or redemption of fund shares. Investment
performance reflects fee waivers that are or were in effect. In the absence
of such fee waivers, total returns would be reduced. Index performance is
for illustrative purposes only and does not reflect any expenses,
transaction costs, or cash flow effects. Direct investment in the index is
not available.
A portion of the fund's income may be subject to state and/or federal
income tax, including the alternative minimum tax. Capital gains
distributions, if any, will be subject to tax.
(3) An unmanaged index comprised of fixed-rate, investment-grade tax-exempt
bonds with remaining maturities between six and eight years.
(4) Performance for Class Y shares is not presented. Performance for this class
will vary due to a different expense structure.
Colorado Tax Free Fund
Investment Objective: 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
HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED JUNE 30, 2008?
The First American Colorado Tax Free Fund (the "fund"), Class Y shares, returned
1.67% for the fiscal year ended June 30, 2008 (Class A shares returned 1.52%,
without taking the sales charge into account, for the same period). By
comparison, the fund's benchmark, the Lehman Municipal Bond Index*, returned
3.23%. Performance for the fund's peer group, the Lipper Colorado Municipal Debt
Funds Average, was 1.12%.
WHAT WERE THE GENERAL MUNICIPAL MARKET CONDITIONS DURING THE FISCAL YEAR?
The municipal market endured one of its more tumultuous years ever as fallout
from the housing debacle rocked market participants. Deterioration within their
relatively new mortgage-backed book of business ultimately led to downgrades for
several of the major monoline municipal bond insurers. The impaired credit
quality and loss of confidence in many of the insurers affected much of the
municipal market (use of insurance had become so pervasive that in recent years
close to 50% of all new issuance came to market with an insurance wrap). The
market was buffeted by irregular bouts of volatility and selling pressure as a
number of accounts unwound positions. For example, tax-exempt money funds were
forced to exit insured holdings en masse due to minimum ratings and liquidity
requirements. To reduce debt, many municipal market investors were pressured to
sell longer-maturity bonds when the floating-rate component of their borrowing
programs was no longer money-fund eligible (the municipal market had in recent
years developed its own form of "carry" trade, in which investors borrow in the
short-term money markets and invest in longer maturities, trying to take
advantage of the relative steepness of the municipal yield curve in comparison
to other fixed-income markets).
Credit spreads (i.e., the differences in yield between higher- and lower-quality
debt) were the first to widen as the market anticipated that lower-quality debt
would struggle in a slowing economy. Ultimately, however, the insurer debacle
cut an even wider swath through the market. Many insured bonds now trade solely
based on the creditworthiness of underlying obligors with little or no value
attributed to the insurance wrap. Not surprisingly, in this environment natural
standalone (i.e., without an insurance wrap) AAA- and AA-rated bonds were
generally the best performers for the year.
The municipal yield curve steepened over the past 12 months as yields on shorter
maturities fell while longer maturity yields rose slightly. In terms of total
return, intermediate maturities generally produced the best returns and
longer-maturity bonds were the weakest-performing part of the curve. Although
the overall municipal market started to regain its bearings near the end of the
fiscal year, high-grade bonds still finished at yields of more than 90% (and in
some cases more than 100%) of comparable-maturity Treasuries, which typically
indicates that the high-grade bonds represent good value relative to Treasuries.
HOW DID MARKET CONDITIONS AND INVESTMENT STRATEGIES AFFECT THE FUND'S
PERFORMANCE?
Reflecting the trends in the broader market, the fund's positions in mid to
lower-grade securities underperformed for the 12-month period. The
best-performing bonds in the fund from a quality standpoint were generally the
natural high-grades (AAA and AA-rated bonds) not affected by either the insurer
debacle or the general widening of credit spreads in lower-grade bonds. The
fund's relative performance improved markedly over the first half of 2008, when
credit spreads - and the performance of lower-rated securities - showed signs of
stabilizing as the market's focus shifted toward the insurer debacle. The entire
year, while tumultuous, produced many relative value opportunities from both a
trading and credit perspective that helped bolster the fund's performance.
WHAT STRATEGIC MOVES WERE MADE BY THE FUND AND WHY?
The fund did slightly increase its duration over the past few months as yields
increased to historically high levels relative to comparable-maturity
Treasuries. Given the high level of turmoil throughout the year and the
resultant supply pressures, the fund added to weightings in a variety of issuers
and revenue bond sectors (comprised of bonds that are backed by the revenue of
specific projects) at wider credit spreads - and therefore lower prices - than
have been available for a number of years. On a security-specific basis, the
fund also sold a number of positions where we anticipated credit stress was not
fully reflected in realized prices.
* Unlike mutual funds, index returns do not reflect any expenses, transaction
costs, or cash flow effects.
PORTFOLIO ALLOCATION AS OF JUNE 30, 2008(1) (% OF NET ASSETS)
Revenue Bonds(3) 76.8%
General Obligations(3) 10.0
Certificates of Participation(3) 7.2
Short-Term Investment 7.5
Other Assets and Liabilities, Net(4) (1.5)
-----
100.0%
=====
BOND CREDIT QUALITY DISTRIBUTION AS OF JUNE 30, 2008(2) (% OF MARKET VALUE)
AAA 13.1%
AA 18.6
A 34.5
BBB 26.3
Non-Rated 7.5
-----
100.0%
=====
(1) Portfolio allocations are subject to change and are not recommendations to
buy or sell any security.
(2) Individual security ratings are based on information from Moody's Investors
Service, Standard & Poor's, and/or Fitch. If there are multiple ratings for
a security, the lowest rating is used unless ratings are provided by all
three agencies, in which case the middle rating is used.
(3) These securities may include bonds that are pre-refunded or escrowed to
maturity issues; see the fund's Notes to Schedule of Investments. As of
June 30, 2008, 17.4% of the fund's net assets were pre-refunded and
escrowed to maturity issues.
(4) Investments typically comprise substantially all of the fund's net assets.
Other assets and liabilities include receivables for items such as income
earned but not yet received and payables for items such as fund expenses
incurred but not yet paid.
ANNUAL PERFORMANCE(1,2) AS OF JUNE 30, 2008
SINCE
INCEPTION
1 YEAR 5 YEARS 2/01/2000
------ ------- ---------
AVERAGE ANNUAL RETURN WITH SALES CHARGE (POP)
Class A (2.78)% 2.02% 5.03%
Class C 0.15% 2.50% 5.16%
AVERAGE ANNUAL RETURN WITHOUT SALES CHARGE (NAV)
Class A 1.52% 2.91% 5.57%
Class C 1.12% 2.50% 5.16%
Class Y 1.67% 3.14% 5.84%
Lehman Municipal Bond Index(3) 3.23% 3.52% 5.71%
THE PERFORMANCE DATA QUOTED ON THIS PAGE REPRESENTS PAST PERFORMANCE AND DOES
NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE OF THE FUND MAY
BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO
THE MOST RECENT MONTH-END MAY BE OBTAINED BY CALLING 800.677.FUND.
(1) TOTAL RETURNS AT NET ASSET VALUE ("NAV") REFLECT PERFORMANCE OVER THE TIME
PERIOD INDICATED WITHOUT INCLUDING THE FUND'S MAXIMUM SALES CHARGE AND
ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
TOTAL RETURNS AT PUBLIC OFFERING PRICE ("POP") REFLECT PERFORMANCE OVER THE
TIME PERIOD INDICATED INCLUDING MAXIMUM SALES CHARGES OF 4.25% FOR CLASS A
SHARES AND THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE ("CDSC") FOR CLASS
C SHARES FOR THE RELEVANT PERIOD. MAXIMUM CDSC IS 1.00% FOR CLASS C SHARES.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DISTRIBUTIONS AT NAV.
INVESTMENTS IN DEBT SECURITIES TYPICALLY DECREASE IN VALUE WHEN INTEREST
RATES RISE. THE RISK IS USUALLY GREATER FOR LONGER-TERM DEBT SECURITIES.
AS OF THE MOST RECENT PROSPECTUS, THE FUND'S TOTAL ANNUAL OPERATING EXPENSE
RATIO (INCLUDING ACQUIRED FUND FEES AND EXPENSES) FOR CLASS A, CLASS C, AND
CLASS Y SHARES WAS 1.76%, 2.25%, AND 1.51%, RESPECTIVELY. THE ADVISOR HAS
CONTRACTUALLY AGREED TO WAIVE FEES AND REIMBURSE OTHER FUND EXPENSES
THROUGH AT LEAST JUNE 30, 2009 SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES
(AFTER WAIVERS AND EXCLUDING ACQUIRED FUND FEES AND EXPENSES) FOR CLASS A,
CLASS C, AND CLASS Y SHARES DO NOT EXCEED 0.75%, 1.15%, AND 0.50%,
RESPECTIVELY. THESE FEE WAIVERS AND EXPENSE REIMBURSEMENTS MAY BE
TERMINATED AT ANY TIME AFTER JUNE 30, 2009, AT THE DISCRETION OF THE
ADVISOR. PRIOR TO THAT TIME, SUCH WAIVERS AND REIMBURSEMENTS MAY NOT BE
TERMINATED WITHOUT THE APPROVAL OF THE FUND'S BOARD OF DIRECTORS.
VALUE OF $10,000 INVESTMENT (1,2,4) AS OF JUNE 30, 2008
Colorado Tax Free Fund, Class A (NAV) $15,780
Colorado Tax Free Fund, Class A (POP) $15,115
Lehman Municipal Bond Index(3) $15,955
The chart at right illustrates the total value of an assumed $10,000 investment
in the fund's Class A shares (from 2/01/2000 to 6/30/2008) as compared to the
Lehman Municipal Bond Index(3).
(PERFORMANCE GRAPH)
(2) Performance does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or redemption of fund shares. Investment
performance reflects fee waivers that are or were in effect. In the absence
of such fee waivers, total returns would be reduced. Index performance is
for illustrative purposes only and does not reflect any expenses,
transaction costs, or cash flow effects. Direct investment in the index is
not available.
A portion of the fund's income may be subject to state and/or federal
income tax, including the alternative minimum tax. Capital gains
distributions, if any, will be subject to tax.
(3) An unmanaged index comprised of fixed-rate, investment-grade tax-exempt
bonds with remaining maturities of one year or more.
(4) Performance for Class C and Class Y shares is not presented. Performance
for these classes will vary due to different expense structures.
FINANCIAL HIGHLIGHTS
The financial highlights tables set forth below are intended to help you
understand each Fund's financial performance for the past five years. 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, 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 year
ended
June 30, Fiscal period Fiscal year ended September 30,
------------------ ended --------------------------------
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------ ------ ---------------- ------ ------ ------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.07 $10.11 $10.35 $10.55 $10.64 $10.80
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.38 0.38 0.28 0.39 0.40 0.41
Realized and Unrealized Gains (Losses) on
Investments (0.06) 0.01 (0.20) (0.13) (0.05) (0.14)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.32 0.39 0.08 0.26 0.35 0.27
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.39) (0.38) (0.29) (0.39) (0.41) (0.41)
Distributions (from net realized gains) (0.01) (0.05) (0.03) (0.07) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Total Distributions (0.40) (0.43) (0.32) (0.46) (0.44) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.99 $10.07 $10.11 $10.35 $10.55 $10.64
====== ====== ====== ====== ====== ======
Total Return(2) 3.20% 3.86% 0.78% 2.51% 3.36% 2.58%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $4,463 $6,226 $3,441 $3,946 $3,381 $4,262
Ratio of Expenses to Average Net Assets 0.73% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.83% 3.66% 3.73% 3.71% 3.78% 3.86%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.27% 1.25% 1.22% 1.10% 1.06% 1.06%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.29% 3.26% 3.36% 3.46% 3.57% 3.65%
Portfolio Turnover Rate 25% 20% 21% 29% 20% 17%
(1) For the 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 year Fiscal period Fiscal year ended September 30,
ended ended -------------------------------
CLASS Y SHARES 2008 June 30, 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------- ------------- ---------------- ------- ------- -------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.09 $ 10.13 $ 10.37 $ 10.57 $ 10.66 $ 10.81
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.39 0.39 0.30 0.40 0.41 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.06) 0.01 (0.21) (0.13) (0.05) (0.14)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.33 0.40 0.09 0.27 0.36 0.29
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.39) (0.39) (0.30) (0.40) (0.42) (0.42)
Distributions (from net realized gains) (0.01) (0.05) (0.03) (0.07) (0.03) (0.02)
------- ------- ------- ------- ------- -------
Total Distributions (0.40) (0.44) (0.33) (0.47) (0.45) (0.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.02 $ 10.09 $ 10.13 $ 10.37 $ 10.57 $ 10.66
======= ======= ======= ======= ======= =======
Total Return(2) 3.33% 4.01% 0.88% 2.66% 3.51% 2.83%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $52,924 $52,966 $51,726 $49,292 $46,953 $44,600
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 3.84% 3.82% 3.89% 3.86% 3.93% 4.02%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.02% 1.00% 0.97% 0.85% 0.81% 0.81%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.52% 3.52% 3.62% 3.71% 3.82% 3.91%
Portfolio Turnover Rate 25% 20% 21% 29% 20% 17%
(1) For the 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.
California Tax Free Fund
Fiscal year
ended
June 30, Fiscal period Fiscal year ended September 30,
--------------------- ended ----------------------------------
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------- ------- ---------------- ------- ------ -------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.98 $ 10.96 $ 11.24 $ 11.40 $11.40 $ 11.63
------- ------- ------- ------- ------ -------
Investment Operations:
Net Investment Income 0.46 0.45 0.33 0.44 0.46 0.47
Realized and Unrealized Gains
(Losses) on Investments (0.23) 0.06 (0.26) (0.05) 0.08 (0.16)
------- ------- ------- ------- ------ -------
Total From Investment Operations 0.23 0.51 0.07 0.39 0.54 0.31
------- ------- ------- ------- ------ -------
Less Distributions:
Dividends (from net investment
income) (0.46) (0.45) (0.33) (0.44) (0.46) (0.47)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------- ------- ------- ------- ------ -------
Total Distributions (0.50) (0.49) (0.35) (0.55) (0.54) (0.54)
------- ------- ------- ------- ------ -------
Net Asset Value, End of Period $ 10.71 $ 10.98 $ 10.96 $ 11.24 $11.40 $ 11.40
======= ======= ======= ======= ====== =======
Total Return(2) 2.11% 4.62% 0.63% 3.50% 4.93% 2.85%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $12,076 $11,375 $10,783 $11,888 $9,513 $11,143
Ratio of Expenses to Average Net
Assets 0.67% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average
Net Assets 4.19% 4.00% 3.99% 3.88% 4.03% 4.16%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.46% 1.46% 1.34% 1.15% 1.09% 1.08%
Ratio of Net Investment Income to
Average
Net Assets (excluding waivers) 3.40% 3.29% 3.40% 3.48% 3.69% 3.83%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
(1) For the 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 year
ended
June 30, Fiscal period Fiscal year ended September 30,
------------------- ended --------------------------------
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------ ------ ---------------- ------ ------ ------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.99 $10.97 $11.25 $11.41 $11.41 $11.64
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.40 0.41 0.30 0.40 0.41 0.43
Realized and Unrealized Gains
(Losses) on Investments (0.22) 0.05 (0.26) (0.05) 0.09 (0.16)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.18 0.46 0.04 0.35 0.50 0.27
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.41) (0.40) (0.30) (0.40) (0.42) (0.43)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------ ------ ------ ------ ------ ------
Total Distributions (0.45) (0.44) (0.32) (0.51) (0.50) (0.50)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.72 $10.99 $10.97 $11.25 $11.41 $11.41
====== ====== ====== ====== ====== ======
Total Return(2) 1.61% 4.17% 0.33% 3.11% 4.52% 2.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,480 $1,507 $3,592 $3,068 $1,294 $1,101
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets 3.68% 3.60% 3.60% 3.47% 3.65% 3.75%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.85% 1.98% 2.09% 1.90% 1.84% 1.83%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 2.98% 2.77% 2.66% 2.72% 2.96% 3.07%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
</Table>
(1) For the 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.
California Tax Free Fund (CONTINUED)
Fiscal year
ended
June 30, Fiscal period Fiscal year ended September 30,
--------------------- ended -----------------------------------
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------- ------- ---------------- ------- ------- -------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.98 $ 10.97 $ 11.25 $ 11.40 $ 11.40 $ 11.63
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.48 0.47 0.35 0.47 0.48 0.49
Realized and Unrealized Gains
(Losses) on Investments (0.23) 0.05 (0.26) (0.04) 0.09 (0.15)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.25 0.52 0.09 0.43 0.57 0.34
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment
income) (0.48) (0.47) (0.35) (0.47) (0.49) (0.50)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------- ------- ------- ------- ------- -------
Total Distributions (0.52) (0.51) (0.37) (0.58) (0.57) (0.57)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.71 $ 10.98 $ 10.97 $ 11.25 $ 11.40 $ 11.40
======= ======= ======= ======= ======= =======
Total Return(2) 2.28% 4.78% 0.82% 3.85% 5.19% 3.11%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $30,485 $24,835 $21,767 $19,556 $16,047 $15,243
Ratio of Expenses to Average Net
Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.36% 4.25% 4.24% 4.12% 4.29% 4.40%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.20% 1.21% 1.09% 0.90% 0.84% 0.83%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.66% 3.54% 3.65% 3.72% 3.95% 4.07%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
</Table>
(1) For the 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 Intermediate Tax Free Fund
Fiscal year
ended
June 30, Fiscal period Fiscal year ended September 30,
------------------ ended -------------------------------
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------ ------ ---------------- ------- ------- -------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.33 $10.40 $10.74 $ 10.98 $ 11.08 $ 11.12
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.41 0.43 0.32 0.42 0.45 0.41
Realized and Unrealized Gains (Losses) on
Investments (0.10) 0.01 (0.28) (0.19) (0.11) (0.02)
------ ------ ------ ------- ------- -------
Total From Investment Operations 0.31 0.44 0.04 0.23 0.34 0.39
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.40) (0.43) (0.32) (0.43) (0.44) (0.43)
Distributions (from net realized gains) (0.05) (0.08) (0.06) (0.04) -- --
------ ------ ------ ------- ------- -------
Total Distributions (0.45) (0.51) (0.38) (0.47) (0.44) (0.43)
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.19 $10.33 $10.40 $ 10.74 $ 10.98 $ 11.08
====== ====== ====== ======= ======= =======
Total Return(2) 3.04% 4.21% 0.37% 2.11% 3.12% 3.64%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,199 $6,783 $9,577 $13,426 $13,969 $22,555
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.92% 3.99% 4.02% 3.85% 4.00% 3.79%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.33% 1.36% 1.27% 1.10% 1.06% 1.06%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.44% 3.48% 3.60% 3.60% 3.79% 3.58%
Portfolio Turnover Rate 21% 35% 17% 20% 4% 14%
(1) For the 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 year
ended
June 30, Fiscal period Fiscal year ended September 30,
-------------------- ended -------------------------------
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------- ------- ---------------- ------- ------- -------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.30 $ 10.38 $ 10.72 $ 10.95 $ 11.05 $ 11.10
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.42 0.43 0.33 0.43 0.46 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.09) 0.01 (0.28) (0.18) (0.11) (0.03)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.33 0.44 0.05 0.25 0.35 0.40
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.42) (0.44) (0.33) (0.44) (0.45) (0.45)
Distributions (from net realized gains) (0.05) (0.08) (0.06) (0.04) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.47) (0.52) (0.39) (0.48) (0.45) (0.45)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.16 $ 10.30 $ 10.38 $ 10.72 $ 10.95 $ 11.05
======= ======= ======= ======= ======= =======
Total Return(2) 3.20% 4.28% 0.49% 2.36% 3.29% 3.71%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $43,933 $34,447 $32,661 $34,562 $37,748 $47,854
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 4.05% 4.14% 4.18% 4.01% 4.15% 3.94%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.08% 1.11% 1.02% 0.85% 0.81% 0.81%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.67% 3.73% 3.86% 3.86% 4.04% 3.83%
Portfolio Turnover Rate 21% 35% 17% 20% 4% 14%
(1) For the 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 year
ended
June 30, Fiscal period Fiscal year ended September 30,
------------------- ended ----------------------------------
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------ ------ ---------------- ------ ------- -------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.61 $10.73 $11.30 $11.52 $ 11.57 $ 11.65
------ ------ ------ ------ ------- -------
Investment Operations:
Net Investment Income 0.48 0.46 0.35 0.49 0.51 0.50
Realized and Unrealized Gains (Losses)
on Investments (0.33) (0.02) (0.26) (0.11) 0.02 (0.10)
------ ------ ------ ------ ------- -------
Total From Investment Operations 0.15 0.44 0.09 0.38 0.53 0.40
------ ------ ------ ------ ------- -------
Less Distributions:
Dividends (from net investment income) (0.45) (0.48) (0.34) (0.51) (0.50) (0.48)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------ ------ ------ ------ ------- -------
Total Distributions (0.48) (0.56) (0.66) (0.60) (0.58) (0.48)
------ ------ ------ ------ ------- -------
Net Asset Value, End of Period $10.28 $10.61 $10.73 $11.30 $ 11.52 $ 11.57
====== ====== ====== ====== ======= =======
Total Return(2) 1.52% 4.13% 0.77% 3.36% 4.71% 3.53%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,815 $8,788 $8,507 $8,362 $10,598 $13,843
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets 4.40% 4.27% 4.30% 4.23% 4.25% 4.23%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.80% 1.75% 1.52% 1.18% 1.09% 1.07%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.35% 3.27% 3.53% 3.80% 3.91% 3.91%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
(1) For the 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 year
ended
June 30, Fiscal period Fiscal year ended September 30,
------------------- ended --------------------------------
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------ ------ ---------------- ------ ------ ------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.59 $10.71 $11.28 $11.50 $11.56 $11.63
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.42 0.42 0.32 0.43 0.44 0.44
Realized and Unrealized Gains
(Losses) on Investments (0.31) (0.02) (0.27) (0.10) 0.03 (0.08)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.11 0.40 0.05 0.33 0.47 0.36
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.41) (0.44) (0.30) (0.46) (0.45) (0.43)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------ ------ ------ ------ ------ ------
Total Distributions (0.44) (0.52) (0.62) (0.55) (0.53) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.26 $10.59 $10.71 $11.28 $11.50 $11.56
====== ====== ====== ====== ====== ======
Total Return(2) 1.12% 3.72% 0.47% 2.95% 4.21% 3.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,859 $2,888 $3,007 $3,423 $3,787 $4,284
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets 3.98% 3.87% 3.90% 3.83% 3.85% 3.83%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.20% 2.24% 2.27% 1.93% 1.84% 1.82%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 2.93% 2.78% 2.78% 3.05% 3.16% 3.16%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
(1) For the 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.
Colorado Tax Free Fund (CONTINUED)
Fiscal year
ended
June 30, Fiscal period Fiscal year ended September 30,
--------------------- ended --------------------------------
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------- ------- ------- ---------------- ------ ------ ------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.63 $ 10.75 $ 11.32 $11.53 $11.59 $11.67
------- ------- ------- ------ ------ ------
Investment Operations:
Net Investment Income 0.49 0.50 0.37 0.51 0.52 0.51
Realized and Unrealized Gains
(Losses) on Investments (0.32) (0.03) (0.26) (0.09) 0.03 (0.09)
------- ------- ------- ------ ------ ------
Total From Investment Operations 0.17 0.47 0.11 0.42 0.55 0.42
------- ------- ------- ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.48) (0.51) (0.36) (0.54) (0.53) (0.50)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------- ------- ------- ------ ------ ------
Total Distributions (0.51) (0.59) (0.68) (0.63) (0.61) (0.50)
------- ------- ------- ------ ------ ------
Net Asset Value, End of Period $ 10.29 $ 10.63 $ 10.75 $11.32 $11.53 $11.59
======= ======= ======= ====== ====== ======
Total Return(2) 1.67% 4.39% 0.96% 3.70% 4.87% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $15,889 $13,477 $10,181 $8,363 $9,439 $9,516
Ratio of Expenses to Average Net
Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.63% 4.51% 4.58% 4.48% 4.51% 4.49%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.55% 1.50% 1.27% 0.93% 0.84% 0.82%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.58% 3.51% 3.81% 4.05% 4.17% 4.17%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
(1) For the 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.
VOTING INFORMATION
GENERAL INFORMATION
This Prospectus/Proxy Statement is being sent to shareholders of California
Intermediate Tax Free Fund and Colorado Intermediate Tax Free Fund, each a
series of FAIF, in connection with a solicitation of proxies by the Board of
Directors, to be used at the Meeting. This Prospectus/Proxy Statement, along
with a Notice of the Meeting and a proxy card, is first being mailed to
shareholders of the Acquired Funds on or about November __, 2008.
The Board of Directors has fixed the close of business on November 4, 2008,
as the record date (the "Record Date") for determining the shareholders of the
Acquired Funds entitled to receive notice of the Meeting and to submit proxies,
and for determining the number of shares for which proxies may be submitted,
with respect to the Meeting or any adjournment thereof.
VOTING RIGHTS AND REQUIRED VOTE
Shares which represent interests in a particular Acquired Fund vote
separately on the Reorganization pertaining to that Acquired Fund. Approval of a
Reorganization will require the affirmative vote of a majority of the
outstanding shares of the Acquired Fund, with both classes of the Acquired Fund
voting together and not by class. Abstentions will be counted for purposes of
determining a quorum, but will not be included in the amount of shares voted.
Accordingly, an abstention will have the effect of a negative vote. Approval of
the Reorganization Plan with respect to an Acquired Fund will be considered
approval of the amendment to the Amended and Restated Articles of Incorporation
of FAIF (which amendment is included as Exhibit 1 to the Reorganization Plan
which is included as Appendix A to this Prospectus/Proxy Statement) required to
effect the Reorganization.
25
If a proxy that is properly executed and returned represents a broker
"non-vote" (broker non-votes are shares held by a broker or nominee for which an
executed proxy is received by the Fund but are not voted as to the proposal
because instructions have not been received from the beneficial owners or
persons entitled to vote, and the broker or nominee holding the shares does not
have discretionary voting power), the shares represented thereby will only be
considered present for purposes of determining the existence of a quorum for the
transaction of business and will not be included in determining the number of
votes cast. Accordingly, broker non-votes will have the effect of negative
votes.
The individuals named as proxies on the enclosed proxy card will vote in
accordance with your direction as indicated thereon, if your card is received
properly executed by you or by your duly appointed agent or attorney-in-fact. If
your card is properly executed and you give no voting instructions, your shares
will be voted FOR the Reorganization. You can also vote by telephone, with a
toll-free call to the appropriate number on the proxy card, and through the
Internet site stated on the proxy card.
You may revoke any proxy by giving another proxy or by letter or telegram
revoking the initial proxy. In addition, you can revoke a prior proxy by simply
voting again using the proxy card, by a toll-free call to the appropriate number
on the proxy card, or through the Internet site listed on the proxy card. To be
effective, your revocation must be received prior to the Meeting and must
indicate your name and account number. In addition, if you attend the Meeting in
person you may, if you wish, vote by ballot at the Meeting, thereby canceling
any proxy previously given.
Proxy solicitations will be made primarily by mail but may also be made by
telephone, through the Internet or personal solicitations conducted by officers
and employees of the Advisor, its affiliates or other representatives of
Acquired Funds (who will not be paid for their soliciting activities). The costs
of solicitation and the expenses incurred in connection with preparing this
Prospectus/Proxy Statement and its enclosures will be paid by the Advisor.
Neither the Acquired Funds nor the Acquiring Funds will bear any costs
associated with the Meeting, this proxy solicitation or any adjourned session.
If shareholders of an Acquired Fund do not vote to approve the applicable
Reorganization, the Directors will consider other possible courses of action in
the best interests of shareholders. If a quorum is not present at the Meeting,
or if a quorum is present at the Meeting but sufficient votes to approve a
Reorganization are not received, the persons named as proxies on a proxy form
sent to the shareholders may propose one or more adjournments of the Meeting to
permit further proxy solicitation. In determining whether to adjourn the
Meeting, the following factors may be considered: the percentage of votes
actually cast, the percentage of negative votes actually cast, the nature of any
further solicitation and the information to be provided to shareholders with
respect to the reasons for the solicitation. Any adjournment will require an
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote upon such adjournment
after consideration of all circumstances which may bear upon a decision to
adjourn the Meeting.
A shareholder of an Acquired Fund who objects to the Reorganization will
not be entitled under either Maryland law or the Amended and Restated Articles
of Incorporation of FAIF to demand payment for, or an appraisal of, his or her
shares.
FAIF does not hold annual shareholder meetings. Shareholders wishing to
submit proposals to be considered for inclusion in a proxy statement for a
subsequent shareholder meeting should send their written proposals to the
Secretary of FAIF at the address set forth on the cover of this Prospectus/Proxy
Statement so that they will be received by FAIF in a reasonable period of time
prior to that meeting.
The votes of the shareholders of the Acquiring Funds are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the proposed Reorganizations.
26
OUTSTANDING SHARES
The shareholders of each Acquired Fund as of the Record Date will be
entitled to be present at the Meeting and vote their shares of the applicable
Acquired Fund owned as of the Record Date.
The following table identifies the number of shares of each class of each
Acquired Fund and Acquiring Fund that were outstanding as of the close of
business on the Record Date:
CALIFORNIA CALIFORNIA COLORADO COLORADO
INTERMEDIATE TAX TAX INTERMEDIATE TAX TAX
FREE FUND FREE FUND FREE FUND FREE FUND
---------------- ------------- ---------------- -------------
CLASS A 431,268.430 1,144,062.229 652,192.054 546,338.008
CLASS C N/A 251,983.929 N/A 293,224.970
CLASS Y 5,301,221.401 2,861,144.131 4,252,741.745 1,611,868.937
SHAREHOLDER RIGHTS
Each Fund is a separate series of FAIF. Since the Funds are part of the
same corporate entity, there are no differences in shareholders' rights between
an Acquired Fund and its corresponding Acquiring Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the Record Date, the officers and directors of FAIF beneficially
owned as a group less than 1% of the outstanding shares of each Fund, and FAIF
was aware that the following persons owned of record 5% or more of the
outstanding shares of each class of stock of the Funds:
PERCENT OF
OUTSTANDING SHARES
NUMBER OF ---------------------------
SHARES OWNED CLASS A CLASS C CLASS Y
------------ ------- ------- -------
CALIFORNIA INTERMEDIATE TAX FREE FUND
UBS Financial Services Inc. FBO 38,843.73 9.01%
Linbrook Tile, Inc.
1656 S State College Blvd
Anaheim CA 92806-6021
U.S. Bancorp Investments Inc. 36,437.14 8.45%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bancorp Investments Inc. 29,932.32 6.94%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bank, Trustee FBO Various 5,108,619.82 96.36%
Trust Clients(1) PO Box 1787
Milwaukee WI 53201-1787
CALIFORNIA TAX FREE FUND
U.S. Bancorp Investments Inc. 143,123.99 12.51%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bancorp Investments Inc. 81,020.24 7.08%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bancorp Investments Inc. 30,248.41 12.00%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bancorp Investments Inc. 29,763.41 11.81%
60 Livingston Ave
Saint Paul MN 55107-2292
U.S. Bancorp Investments Inc. 27,907.28 11.08%
60 Livingston Ave
Saint Paul MN 55107-2292
MS&CO FBO 13,973.04 5.55%
Cecil Richard Brown & J Brown
CO-TTEE The Brown Family
Tr U/A Dtd 09/13/1995
79765 Liga
La Quinta CA 92253-4578
First Clearing LLC 12,689.75 5.04%
The Angelo V Pennisi & Diane M
Pennisi 2005 Rev Trust
12945 Orange Rd
Wilton CA 95693-9664
U.S. Bank, Trustee FBO Various 2,751,060.56 96.15%
Trust Clients
PO Box 1787
Milwaukee WI 53201-1787
27
COLORADO INTERMEDIATE TAX FREE FUND
Merrill Lynch Pierce Fenner & Smith 73,286.89 11.24%
Attn Physical Team
4800 Deer Lake Dr E
Jacksonville FL 32246-6484
U.S. Bank, Trustee FBO Various 4,028,991.39 94.73%
Trust Clients(1) PO Box 1787
Milwaukee WI 53201-1787
COLORADO TAX FREE FUND
UBS Financial Services Inc. FBO 23,652.93 8.07%
M B E Limited Partnership
C/O Don Ditmars
A Partnership
PO Box 126
Castle Rock CO 80104-0126
U.S. Bank, Trustee FBO Various 1,239,847.04 76.92%
Trust Clients
PO Box 1787
Milwaukee WI 53201-1787
NFS LLC FEBO 314,849.88 19.53%
Alliance Bank NA
Alliance Bank Trust Department
160 Main St
Oneida NY 13421-1629
(1) U.S. Bank National Association, the parent of the Advisor, serves as
trustee for the accounts of various trust clients. As trustee, U.S. Bank
has voting authority with respect to certain of the Fund's outstanding
shares beneficially owned by these accounts and, with respect to all such
shares, intends to vote according to the recommendation of an independent
proxy voting service.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information concerning the Funds in the Funds' current prospectuses and SAI
(including any supplements) and information in the Reorganization SAI is
incorporated into this Prospectus/Proxy Statement by reference. This means that
such information is legally considered to be part of this Prospectus/Proxy
Statement. For a free copy of an Acquired Fund's prospectus, the Funds'
Statement of Additional Information or annual report, or the Reorganization SAI,
please call (800) 677-3863 or write to First American Investment Funds, Inc.,
800 Nicollet Mall, Minneapolis, MN 55402.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files reports
and other information including proxy material and charter documents with the
SEC. These items can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Regional Offices located at 175 West Jackson Boulevard, Chicago,
Illinois 60604 and at 3 World Financial Center, New York, New York 10281. Copies
of such materials can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549. Further information
on the operations of the public reference facilities may be obtained by calling
(800) SEC-0330. In addition, the SEC maintains an Internet site that contains
copies of the information. The address of the site is www.sec.gov.
MISCELLANEOUS
LEGAL MATTERS
Certain legal matters in connection with the issuance of Acquiring Fund
shares as part of the Reorganization will be passed on by Dorsey & Whitney LLP,
50 South Sixth Street, Suite 1500, Minneapolis, MN 55402.
EXPERTS
The audited financial statements for the Funds, incorporated by reference
into the Reorganization SAI, have been audited by Ernst & Young LLP, an
independent registered public accounting firm, as set forth in their report
appearing in the Funds' annual report for the fiscal year ended June 30, 2008.
The financial statements audited by Ernst & Young LLP have been incorporated by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
28
OTHER BUSINESS
The board of directors does not intend to present any other business at the
Meeting. If, however, any other matters are properly brought before the Meeting,
the persons named in the accompanying form of proxy will vote thereon in
accordance with their judgment.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES
AND THEIR NOMINEES
Please advise FAIF, in care of FAF Advisors, Inc., Mail Stop BC-MN-H04N,
800 Nicollet Mall, Minneapolis, MN 55402, whether other persons are beneficial
owners of Acquired Fund shares for which proxies are being solicited and, if so,
the number of copies of this Prospectus/Proxy Statement you wish to receive in
order to supply copies to the beneficial owners of the respective shares.
BOARD RECOMMENDATION
REQUIRED VOTE. Approval of the Reorganization Plan with respect to an
Acquired Fund requires the affirmative vote of a majority of the Fund's
outstanding voting securities.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
PROPOSED REORGANIZATION OF YOUR ACQUIRED FUND AND TO APPROVE THE REORGANIZATION
PLAN WITH RESPECT TO YOUR ACQUIRED FUND.
November __, 2008
29
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this ____ day of December, 2008, by First American Investment Funds, Inc., a
Maryland corporation with its principal place of business at 800 Nicollet Mall,
Minneapolis, Minnesota 55402 ("FAIF"), on behalf of each segregated portfolio of
assets ("series") thereof listed on Schedule A to this Plan ("Schedule A").
(Each such series listed under the heading "Acquired Funds" is referred to
herein as an "Acquired Fund," each such series listed under the heading
"Acquiring Funds" is referred to herein as an "Acquiring Fund," and all such
series are sometimes referred to herein individually as a "Fund" and
collectively as the "Funds.")
FAIF wishes to effect two separate reorganizations, each described in
section 368(a)(1) of the Internal Revenue Code of 1986, as amended ("Code"), and
intends this Agreement to be, and adopts it as, a "plan of reorganization"
within the meaning of the regulations under section 368 of the Code
("Regulations"). Each reorganization will involve the transfer of an Acquired
Fund's assets to the Acquiring Fund listed on Schedule A opposite its name
(each, a "corresponding Acquiring Fund") in exchange solely for voting shares of
common stock, par value $0.0001 per share, of that Acquiring Fund ("Acquiring
Fund Shares") and that Acquiring Fund's assumption of that Acquired Fund's
liabilities, followed by the constructive distribution of those shares pro rata
to the holders of shares of common stock, par value $0.0001 per share, of that
Acquired Fund ("Acquired Fund Shares") in exchange therefor, all on the terms
and conditions set forth herein. (Each such series of transactions involving
each Acquired Fund and its corresponding Acquiring Fund is referred to herein as
a "Reorganization.") The exchange of Acquiring Fund Shares for Acquired Fund
Shares will be effected pursuant to an amendment to FAIF's amended and restated
articles of incorporation in the form attached hereto as Exhibit 1 (the
"Amendment") to be adopted in accordance with the Maryland General Corporation
Law.
The consummation of one Reorganization is not contingent on the
consummation of any other Reorganization. (For convenience, the balance of this
Agreement refers only to a single Reorganization, one Acquired Fund, and one
Acquiring Fund, but the terms and conditions hereof apply separately to each
Reorganization and the Funds participating therein.)
WITNESSETH:
WHEREAS, FAIF is a registered, open-end management investment company that
offers its shares of common stock in multiple series (each of which series
represents a separate and distinct portfolio of assets and liabilities);
WHEREAS, the Acquiring Fund offers Class A shares, Class C shares and Class
Y shares and the Acquired Fund offers Class A shares and Class Y;
WHEREAS, the Acquired Fund owns securities which generally are assets of
the character in which the Acquiring Fund is permitted to invest; and
WHEREAS, the Board of Directors of FAIF has determined that the
consolidation of the Acquired Fund with and into the Acquiring Fund by means of
the exchange of Class A and Class Y Acquiring Fund Shares for all of the issued
and outstanding Class A and Class Y Acquired Fund Shares,
A-1
respectively, on the basis set forth herein is in the best interests of the
Acquired Fund shareholders and the Acquiring Fund shareholders and has made the
determinations required by Rule 17a-8 under the Investment Company Act of 1940,
as amended (the "1940 Act") with respect to the Reorganization;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. EXCHANGE OF SHARES; REALLOCATION OF ASSETS AND LIABILITIES
1.1 Subject to the requisite approval by the Acquired Fund shareholders and
to the other terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund and the
Acquiring Fund agree that at the Effective Time (as defined in Section 3.1), (a)
each issued and outstanding Class A Acquired Fund Share shall be, without
further action, exchanged for that number of Class A Acquiring Fund Shares
calculated in accordance with Article 2 hereof and the Amendment; and (b) each
issued and outstanding Class Y Acquired Fund Share shall be, without further
action, exchanged for that number of Class Y Acquiring Fund Shares calculated in
accordance with Article 2 hereof and the Amendment.
1.2 (a) At the Effective Time, the assets belonging to the Acquired Fund,
the liabilities belonging to the Acquired Fund, and the General Assets and
General Liabilities allocated to the Acquired Fund, shall become, without
further action, assets belonging to the Acquiring Fund, liabilities belonging to
the Acquiring Fund, and General Assets and General Liabilities allocated to the
Acquiring Fund, all in accordance with Article IV, Section 1(d)(i) and (ii) of
FAIF's amended and restated articles of incorporation. For purposes of the
foregoing, the terms "assets belonging to," "liabilities belonging to," "General
Assets" and "General Liabilities" have the meanings assigned to them in said
Article IV, Section 1(d)(i) and (ii). Such assets belonging to the Acquired Fund
to become assets belonging to the Acquiring Fund shall consist of all of the
Acquired Fund's property, including, but not limited to, all cash, securities,
commodities and futures interests and dividends or interest receivable which are
assets belonging to the Acquired Fund as of the Effective Time. All of said
assets shall be set forth in detail in an unaudited statement of assets and
liabilities of the Acquired Fund as of the Effective Time (the "Effective Time
Statement"). The Effective Time Statement shall, with respect to the listing of
the Acquired Fund's portfolio securities, detail the adjusted tax basis of such
securities by lot, the respective holding periods of such securities and the
current and accumulated earnings and profits of the Acquired Fund. The Effective
Time Statement shall be prepared in accordance with generally accepted
accounting principles (except for footnotes) consistently applied.
(b) The Acquired Fund has provided the Acquiring Fund with a list of all of
the Acquired Fund's assets as of the date of execution of this Agreement. The
Acquired Fund reserves the right to sell any of these securities prior to the
Effective Time and to acquire additional securities in the ordinary course of
its business.
1.3 Pursuant to Section 1.2(a), at the Effective Time the liabilities,
expenses, costs, charges and reserves (including, but not limited to, expenses
incurred in the ordinary course of the Acquired Fund's operations, such as
accounts payable relating to custodian and transfer agency fees, investment
management and administrative fees, and legal and audit fees) as reflected in
the Effective Time Statement shall become liabilities, expenses, costs, charges
and reserves of the Acquiring Fund.
1.4 At the Effective Time and pursuant to the plan of reorganization
adopted herein, the Acquiring Fund will issue and, on behalf of the Acquired
Fund, distribute to the Acquired Fund's shareholders of record, determined as of
the Effective Time (the "Acquired Fund Shareholders"), the Acquiring Fund Shares
issued in exchange for the Acquired Fund Shares pursuant to Section 1.1 and
A-2
Article 2. Thereafter, no additional shares representing interests in the
Acquired Fund shall be issued, and the Acquired Fund shall be deemed to be
liquidated. Such distribution shall be accomplished by the issuance of such
Acquiring Fund Shares to open accounts on the share records of the Acquiring
Fund in the names of the Acquired Fund Shareholders representing the numbers and
classes of Acquiring Fund Shares due each such shareholder. All issued and
outstanding shares of the Acquired Fund will simultaneously be cancelled on the
books of the Acquired Fund, although from and after the Effective Time share
certificates representing interests in the Acquired Fund will represent those
numbers and classes of Acquiring Fund Shares as determined in accordance with
Article 2. Unless requested by Acquired Fund Shareholders, the Acquiring Fund
will not issue certificates representing the Acquiring Fund Shares in connection
with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's Prospectus and Statement of Additional
Information (in effect as of the Effective Time), except that no sales charges
will be incurred by the Acquired Fund Shareholders in connection with the
acquisition by the Acquired Fund Shareholders of Acquiring Fund Shares pursuant
to this Agreement.
1.6 In the event that Class A shares of the Acquiring Fund are distributed
in the Reorganization to former holders of Class A shares of the Acquired Fund
with respect to which the front-end sales charge was waived due to a purchase of
$1 million or more, the Acquiring Fund agrees that in determining whether a
deferred sales charge is payable upon the sale of such Class A shares of the
Acquiring Fund it shall give credit for the period during which the holder
thereof held such Acquired Fund shares.
1.7 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commissions, and any federal, state or local tax
authorities or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. EXCHANGE RATIOS; VALUATION; ISSUANCE OF ACQUIRING FUND SHARES
2.1 The net asset value per share of the Acquired Fund's and the Acquiring
Fund's Class A shares and Class Y shares shall be computed as of the Effective
Time using the valuation procedures set forth in FAIF's amended and restated
articles of incorporation and bylaws and then-current Prospectuses and Statement
of Additional Information and as may be required by the 1940 Act.
2.2 (a) The total number of the Acquiring Fund's Class A shares to be
issued (including fractional shares, if any) in exchange for the Acquired Fund's
Class A shares shall be determined as of the Effective Time by multiplying the
number of the Acquired Fund's Class A shares outstanding immediately prior to
the Effective Time times a fraction, the numerator of which is the net asset
value per share of the Acquired Fund's Class A shares immediately prior to the
Effective Time, and the denominator of which is the net asset value per share of
the Acquiring Fund's Class A shares immediately prior to the Effective Time,
each as determined pursuant to Section 2.1.
(b) The total number of the Acquiring Fund's Class Y shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's Class
Y shares shall be determined as of the Effective Time by multiplying the number
of the Acquired Fund's Class Y shares outstanding immediately prior to the
Effective Time times a fraction, the numerator of which is the net asset value
per
A-3
share of the Acquired Fund's Class Y shares immediately prior to the Effective
Time, and the denominator of which is the net asset value per share of the
Acquiring Fund's Class Y shares immediately prior to the Effective Time, each as
determined pursuant to Section 2.1.
2.3 At the Effective Time, the Acquiring Fund shall issue and, on behalf of
the Acquired Fund, distribute to the Acquired Fund Shareholders of the
respective classes pro rata within such classes (based upon the ratio that the
number of Acquired Fund shares of the respective classes owned by each Acquired
Fund Shareholder immediately prior to the Effective Time bears to the total
number of issued and outstanding Acquired Fund shares of the respective classes
immediately prior to the Effective Time) the full and fractional Acquiring Fund
Shares of the respective classes to be issued by the Acquiring Fund pursuant to
Section 2.2. Accordingly, each Class A Acquired Fund Shareholder shall receive,
at the Effective Time, Class A Acquiring Fund Shares with an aggregate net asset
value equal to the aggregate net asset value of the Class A Acquired Fund Shares
owned by such Acquired Fund Shareholder immediately prior to the Effective Time;
and each Class Y Acquired Fund Shareholder shall receive, at the Effective Time,
Class Y Acquiring Fund Shares with an aggregate net asset value equal to the
aggregate net asset value of the Class Y Acquired Fund Shares owned by such
Acquired Fund Shareholder immediately prior to the Effective Time.
3. EFFECTIVE TIME OF CLOSING
3.1 The closing of the transactions contemplated by this Agreement (the
"Closing") shall occur as of the close of normal trading on the New York Stock
Exchange (the "Exchange") (currently, 4:00 p.m. Eastern time) on the first day
upon which the conditions to closing shall have been satisfied, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing (such time and date being referred to herein as the "Effective Time").
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the Effective Time unless otherwise agreed to by the
parties. The Closing shall be held at the offices of FAF Advisors, Inc., 800
Nicollet Mall, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
3.2 The custodian for the Acquiring Fund (the "Custodian") shall deliver at
the Closing a certificate of an authorized officer stating that the Acquired
Fund's portfolio securities, cash, and any other assets of the Acquired Fund
held by the Custodian will be transferred to the Acquiring Fund at the Effective
Time.
3.3 In the event that the Effective Time would occur on a day on which (a)
the Exchange or another primary trading market for portfolio securities of the
Acquiring Fund or the Acquired Fund shall be closed to trading or trading
thereon shall be restricted, or (b) trading or the reporting of trading on the
Exchange or elsewhere shall be disrupted so that accurate appraisal of the value
of the net assets of the Acquiring Fund or the Acquired Fund is impracticable,
the Effective Time shall be postponed until the close of normal trading on the
Exchange on the first business day when trading shall have been fully resumed
and reporting shall have been restored.
3.4 The Acquired Fund shall deliver at the Closing its certificate stating
that the records maintained by its transfer agent (which shall be made available
to the Acquiring Fund) contain the names and addresses of the Acquired Fund
Shareholders and the number of outstanding Acquired Fund shares owned by each
such shareholder as of the Effective Time. The Acquiring Fund shall certify at
the Closing that the Acquiring Fund Shares required to be issued by it pursuant
to this Agreement have been issued and delivered as required herein. At the
Closing, each party shall deliver to the other such bills of sale, liability
assumption agreements, checks, assignments, share certificates, if any, receipts
or other documents as such other party or its counsel may reasonably request.
A-4
4. REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 The Acquired Fund represents, warrants and covenants to the Acquiring
Fund as follows:
(a) FAIF is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland;
(b) FAIF is a registered investment company classified as a management
company of the open-end type, and its registration with the Commission as an
investment company under the 1940 Act, and of each series of shares offered by
FAIF under the Securities Act of 1933, as amended (the "1933 Act"), is in full
force and effect;
(c) Shares of the Acquired Fund are registered in all jurisdictions in
which they are required to be registered under applicable state securities laws
and any other applicable laws, and said registrations, including any periodic
reports or supplemental filings, are complete and current, and all fees required
to be paid have been paid, and the Acquired Fund is in good standing, is not
subject to any stop orders, and is fully qualified to sell its shares in any
state in which its shares have been registered;
(d) The Acquired Fund is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of FAIF's amended
and restated articles of incorporation or bylaws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which the
Acquired Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or, to the
Acquired Fund's knowledge, threatened against the Acquired Fund or any of its
properties or assets. The Acquired Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(f) The statement of assets and liabilities of the Acquired Fund as at June
30, 2008 has been audited by Ernst & Young LLP, independent accountants, and is
in accordance with generally accepted accounting principles consistently
applied, and such statement (a copy of which has been furnished to the Acquiring
Fund) presents fairly, in all material respects, the financial position of the
Acquired Fund as at such date, and there are no known material contingent
liabilities of the Acquired Fund as at such date not disclosed therein;
(g) Since June 30, 2008, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, except as otherwise
disclosed to the Acquiring Fund. For the purposes of this paragraph (g), a
decline in net asset value per share of the Acquired Fund, the discharge or
incurrence of Acquired Fund liabilities in the ordinary course of business, or
the redemption of Acquired Fund shares by Acquired Fund Shareholders shall not
constitute such a material adverse change;
(h) All material federal and other tax returns and reports of the Acquired
Fund required by law to have been filed prior to the Effective Time shall have
been filed and shall be correct, and all federal and other taxes shown as due or
required to be shown as due on said returns and reports shall have been paid or
provision shall have been made for the payment thereof, and, to the best of the
Acquired Fund's knowledge, no such return is currently or shall be under audit
and no assessment shall have been asserted with respect to such returns;
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(i) For each taxable year of its operation, the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company, and the Acquired Fund intends to meet the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company for its final, partial taxable year;
(j) All issued and outstanding shares of the Acquired Fund are, and at the
Effective Time will be, duly and validly issued and outstanding, fully paid and
non-assessable. All of the issued and outstanding shares of the Acquired Fund
will, at the Effective Time, be held by the persons and in the amounts set forth
in the records of the Acquired Fund, as provided in Section 3.4. The Acquired
Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquired Fund shares, and there is not
outstanding any security convertible into any of the Acquired Fund shares;
(k) At the Effective Time, the Acquired Fund will have good and marketable
title to the Acquired Fund's assets to be allocated to the Acquiring Fund
pursuant to Section 1.2, and from and after the Effective Time the Acquiring
Fund will have good and marketable title thereto, subject to no restrictions on
the transfer thereof, including such restrictions as might arise under the 1933
Act other than as disclosed to the Acquiring Fund in the Effective Time
Statement;
(l) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action on the
part of FAIF's Board of Directors, and, subject to the approval of the Acquired
Fund Shareholders, this Agreement will constitute a valid and binding obligation
of the Acquired Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws relating to or affecting creditors' rights and to the
application of equitable principles in any proceeding, whether at law or in
equity;
(m) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects;
(n) All information pertaining to the Acquired Fund and its agents and
affiliates and included in the Registration Statement referred to in Section 5.5
(or supplied by the Acquired Fund, its agents or affiliates for inclusion in
said Registration Statement), on the effective date of said Registration
Statement and up to and including the Effective Time, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially misleading
(other than as may timely be remedied by further appropriate disclosure);
(o) Since June 30, 2008, there have been no material changes by the
Acquired Fund in accounting methods, principles or practices, including those
required by generally accepted accounting principles, except as disclosed in
writing to the Acquiring Fund; and
(p) The Effective Time Statement will be prepared in accordance with
generally accepted accounting principles (except for footnotes) consistently
applied and will present accurately the assets and liabilities of the Acquired
Fund as of the Effective Time, and the values of the Acquired Fund's assets and
liabilities to be set forth in the Effective Time Statement will be computed as
of the Effective Time using the valuation procedures set forth in the Acquired
Fund's amended and restated articles of incorporation and bylaws and
then-current Prospectus and Statement of Additional Information and as may be
required by the 1940 Act.
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4.2 The Acquiring Fund represents, warrants and covenants to the Acquired
Fund as follows:
(a) FAIF is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland;
(b) FAIF is a registered investment company classified as a management
company of the open-end type, and its registration with the Commission as an
investment company under the 1940 Act, and of each series of shares offered by
FAIF under the 1933 Act, is in full force and effect;
(c) At or before the Effective Time, shares of the Acquiring Fund
(including, but not limited to, the Acquiring Fund Shares) will be registered in
all jurisdictions in which they will be required to be registered under
applicable state securities laws and any other applicable laws (including, but
not limited to, all jurisdictions necessary to effect the Reorganization), and
said registrations, including any periodic reports or supplemental filings, will
be complete and current, and all fees required to be paid will have been paid,
and the Acquiring Fund will be in good standing, and will not be subject to any
stop orders, and will be fully qualified to sell its shares in any state in
which its shares will have been registered;
(d) The Prospectus and Statement of Additional Information of the Acquiring
Fund, as of the date hereof and up to and including the Effective Time, conform
and will conform in all material respects to the applicable requirements of the
1933 Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not and will not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(e) The Acquiring Fund is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of FAIF's amended
and restated articles of incorporation or bylaws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which the
Acquiring Fund is a party or by which it is bound;
(f) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or, to the
Acquiring Fund's knowledge, threatened against the Acquiring Fund or any of its
properties or assets. The Acquiring Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(g) The statement of assets and liabilities of the Acquiring Fund as at
June 30, 2008 has been audited by Ernst & Young LLP, independent accountants,
and is in accordance with generally accepted accounting principles consistently
applied, and such statement (a copy of which has been furnished to the Acquired
Fund) presents fairly, in all material respects, the financial position of the
Acquiring Fund as at such date, and there are no known material contingent
liabilities of the Acquiring Fund as at such date not disclosed therein;
(h) Since June 30, 2008, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, except as otherwise
disclosed to the Acquired Fund. For the purposes of this paragraph (h), a
decline in net asset value per share of the Acquiring Fund, the discharge or
incurrence of Acquiring Fund liabilities in the ordinary course of business, or
the redemption of Acquiring Fund Shares by Acquiring Fund shareholders shall not
constitute a material adverse change;
(i) All material federal and other tax returns and reports of the Acquiring
Fund required by law to have been filed prior to the Effective Time shall have
been filed and shall be correct, and all
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federal and other taxes shown as due or required to be shown as due on said
returns and reports shall have been paid or provision shall have been made for
the payment thereof, and to the best of the Acquiring Fund's knowledge no such
return is currently or shall be under audit and no assessment shall have been
asserted with respect to such returns;
(j) For each taxable year of its operation, the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company, and the Acquiring Fund intends to meet the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company in the current and future years;
(k) All issued and outstanding shares of the Acquiring Fund are, and at
Effective Time will be, duly and validly issued and outstanding, fully paid and
non-assessable;
(l) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund Shareholders, pursuant to the terms
of this Agreement, at the Effective Time will have been duly authorized and,
when so issued and delivered, will be duly and validly issued Acquiring Fund
Shares and will be fully paid and non-assessable;
(m) The Acquiring Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of the Acquiring Fund Shares, and
there is not outstanding any security convertible into any of the Acquiring Fund
Shares;
(n) At the Effective Time, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets;
(o) Since June 30, 2008, there have been no material changes by the
Acquiring Fund in accounting methods, principles or practices, including those
required by generally accepted accounting principles, except as disclosed in
writing to the Acquired Fund;
(p) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action on the
part of the Board of Directors of FAIF, as issuer of the Acquiring Fund Shares,
and this Agreement will constitute a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws relating to or affecting creditors' rights and to the
application of equitable principles in any proceeding, whether at law or in
equity. Consummation of the transactions contemplated by this Agreement does not
require the approval of the Acquiring Fund's shareholders;
(q) The information to be furnished by the Acquiring Fund for use in
registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects;
(r) Following the Reorganization, the Acquiring Fund shall determine its
net asset value per share in accordance with the valuation procedures set forth
in the Acquiring Fund's amended and restated articles of incorporation, bylaws
and Prospectus and Statement of Additional Information (as the same may be
amended from time to time) and as may be required by the 1940 Act; and
(s) The Registration Statement referred to in Section 5.5, on its effective
date and up to and including the Effective Time, will (i) conform in all
material respects to the applicable requirements of the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the
rules and regulations of the Commission thereunder, and (ii) not contain any
untrue statement of a
A-8
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading (other than as may
timely be remedied by further appropriate disclosure); provided, however, that
the representations and warranties in clause (ii) of this paragraph shall not
apply to statements in (or omissions from) the Registration Statement concerning
the Acquired Fund.
5. FURTHER COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Each of the Acquired Fund and the Acquiring Fund will operate its
business in the ordinary course between the date hereof and the Effective Time,
it being understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions, and any other
distributions that may be advisable (which may include distributions prior to
the Effective Time of net income and/or net realized capital gains not
previously distributed).
5.2 The Acquired Fund will call a meeting of its shareholders to consider
and act upon this Agreement, the Amendment and the Reorganization and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund shares.
5.4 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.5 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary with respect to the Acquired Fund and its agents and
affiliates for the preparation of the Registration Statement on Form N-14 of the
Acquiring Fund (the "Registration Statement"), in compliance with the 1933 Act,
the 1934 Act and the 1940 Act.
5.6 The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state blue sky or securities laws as may be necessary in order to conduct
its operations after the Effective Time.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder at or
before the Effective Time, and, in addition thereto, the following further
conditions (any of which may be waived by the Acquired Fund, in its sole and
absolute discretion):
6.1 All representations and warranties of the Acquiring Fund contained in
this Agreement shall be true and correct as of the date hereof and, except as
they may be affected by the transactions contemplated by this Agreement, as of
the Effective Time with the same force and effect as if made at such time; and
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its President or a Vice President, in a form
reasonably satisfactory to the Acquired Fund and dated as of the date of the
Closing, to the effect that the representations and warranties of the Acquiring
Fund made in this Agreement are true and correct at the Effective Time, except
as they may be affected
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by the transactions contemplated by this Agreement and as to such other matters
as the Acquired Fund shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Acquired
Fund of all of the obligations to be performed by it hereunder at or before the
Effective Time and, in addition thereto, the following conditions (any of which
may be waived by the Acquiring Fund, in its sole and absolute discretion):
7.1 All representations and warranties of the Acquired Fund contained in
this Agreement shall be true and correct as of the date hereof and, except as
they may be affected by the transactions contemplated by this Agreement, as of
the Effective Time with the same force and effect as if made at such time;
7.2 The Acquiring Fund shall have received, and certified as to its receipt
of, the Effective Time Statement;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund a
certificate executed in its name by its President or a Vice President, in form
and substance satisfactory to the Acquiring Fund and dated as of the date of the
Closing, to the effect that the representations and warranties of the Acquired
Fund made in this Agreement are true and correct at and as of the Effective
Time, except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Acquiring Fund shall reasonably
request; and
7.4 At or prior to the Effective Time, the Acquired Fund's investment
advisor, or an affiliate thereof, shall have reimbursed or agreed to reimburse
the Acquired Fund by the amount, if any, that the expenses incurred by the
Acquired Fund (or accrued up to the Effective Time) exceed any applicable
contractual expense limitations.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
The following shall constitute further conditions precedent to the
consummation of the Reorganization:
8.1 This Agreement, the Amendment, and the transactions contemplated herein
and therein shall have been approved by the requisite vote of the holders of the
outstanding shares of the Acquired Fund in accordance with the provisions of
FAIF's amended and restated articles of incorporation and bylaws and applicable
law, and certified copies of the resolutions evidencing such approval shall have
been delivered to the Acquiring Fund. Notwithstanding anything herein to the
contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this Section 8.1;
8.2 The Acquiring Fund's investment advisor shall have paid or agreed to
pay the costs incurred by FAIF in connection with the Reorganization, including
the fees and expenses associated with the preparation and filing of the
Registration Statement referred to in Section 5.5 above, and the expenses of
printing and mailing the prospectus/proxy statement, soliciting proxies and
holding the shareholders meeting required to approve the transactions
contemplated by this Agreement;
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8.3 As of the Effective Time, no action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein;
8.4 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act;
8.6 The parties shall have received the opinion of Dorsey & Whitney LLP
addressed to the Acquired Fund and the Acquiring Fund, dated as of the date of
the Closing, and based in part on certain representations to be furnished by the
Acquired Fund, the Acquiring Fund, and their investment advisor and other
service providers, substantially to the effect that:
(i) the Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1) of the Code, and the Acquiring Fund and the
Acquired Fund each will qualify as a party to the Reorganization under
Section 368(b) of the Code;
(ii) the Acquired Fund Shareholders will recognize no income, gain or loss
upon receipt, pursuant to the Reorganization, of the Acquiring Fund
Shares. Acquired Fund Shareholders subject to taxation will recognize
income upon receipt of any net investment income or net capital gains
of the Acquired Fund which are distributed by the Acquired Fund prior
to the Effective Time;
(iii) the tax basis of the Acquiring Fund Shares received by each Acquired
Fund Shareholder pursuant to the Reorganization will be equal to the
tax basis of the Acquired Fund Shares exchanged therefor;
(iv) the holding period of the Acquiring Fund Shares received by each
Acquired Fund Shareholder pursuant to the Reorganization will include
the period during which the Acquired Fund Shareholder held the
Acquired Fund Shares exchanged therefor, provided that the Acquired
Fund shares were held as a capital asset at the Effective Time;
(v) the Acquired Fund will recognize no income, gain or loss by reason of
the Reorganization;
(vi) the Acquiring Fund will recognize no income, gain or loss by reason of
the Reorganization;
(vii) the tax basis of the assets received by the Acquiring Fund pursuant
to the Reorganization will be the same as the basis of those assets in
the hands of the Acquired Fund as of the Effective Time;
A-11
(viii) the holding period of the assets received by the Acquiring Fund
pursuant to the Reorganization will include the period during which
such assets were held by the Acquired Fund; and
(ix) the Acquiring Fund will succeed to and take into account the earnings
and profits, or deficit in earnings and profits, of the Acquired Fund
as of the Effective Time; and
8.7 The Amendment shall have been filed in accordance with the applicable
provisions of Maryland law.
9. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
9.1 The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties with respect to
the subject matter hereof.
9.2 The representations and warranties contained in this Agreement or in
any document delivered pursuant hereto or in connection herewith shall survive
the consummation of the transactions contemplated hereunder.
10. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by either party by resolution of FAIF's Board of Directors at any
time prior to the Effective Time, if circumstances should develop that, in the
good faith opinion of such Board, make proceeding with the Agreement not in the
best interest of the shareholders of the Acquired Fund or the Acquiring Fund.
11. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund Shareholders called by the Acquired Fund pursuant
to Section 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Acquired Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
12. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered or mailed by registered mail, postage prepaid, addressed to the
Acquiring Fund or the Acquired Fund, 800 Nicollet Mall, Minneapolis, Minnesota
55402, Attention: President (with a copy to Dorsey & Whitney LLP, 50 South Sixth
Street, Minneapolis, Minnesota 55402, Attention: James D. Alt).
13. HEADINGS; COUNTERPARTS; ASSIGNMENT; MISCELLANEOUS
13.1 The Article and Section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same agreement.
13.3 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
13.4 The validity, interpretation and effect of this Agreement shall be
governed exclusively by the laws of the State of Maryland, without giving effect
to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or a Vice President.
FIRST AMERICAN INVESTMENT FUNDS, INC.,
ON BEHALF OF ITS CALIFORNIA INTERMEDIATE
TAX FREE FUND AND COLORADO INTERMEDIATE
TAX FREE FUND
By
------------------------------------
Its
------------------------------------
FIRST AMERICAN INVESTMENT FUNDS, INC.,
ON BEHALF OF ITS CALIFORNIA TAX FREE
FUND AND COLORADO TAX FREE FUND
By
------------------------------------
Its
------------------------------------
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SCHEDULE A TO AGREEMENT AND PLAN OF REORGANIZATION
ACQUIRED FUNDS ACQUIRING FUNDS
-------------- ----------------------------------------
California Intermediate Tax Free Fund California Tax Free Fund
Colorado Intermediate Tax Free Fund Colorado Tax Free Fund
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EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FIRST AMERICAN INVESTMENT FUNDS, INC.
The undersigned officer of First American Investment Funds, Inc. (the
"Corporation"), a Maryland corporation, hereby certifies that the following
amendments to the Corporation's Amended and Restated Articles of Incorporation
have been advised by the Corporation's Board of Directors and approved by the
Corporation's stockholders in the manner required by the Maryland General
Corporation Law:
WHEREAS, the Corporation is registered as an open-end management investment
company (i.e., a mutual fund) under the Investment Company Act of 1940 and
offers its shares to the public in several classes, each of which
represents a separate and distinct portfolio of assets;
WHEREAS, it is desirable and in the best interests of the holders of the
Class Y shares of the Corporation (also known as "California Intermediate
Tax Free Fund") that the assets belonging to such class be sold to a
separate portfolio of the Corporation which is known as "California Tax
Free Fund" and which is represented by the Corporation's Class II shares,
in exchange for shares of California Tax Free Fund which are to be
delivered to former California Intermediate Tax Free Fund holders;
WHEREAS, California Intermediate Tax Free Fund and California Tax Free Fund
have entered into an Agreement and Plan of Reorganization providing for the
foregoing transactions; and
WHEREAS, the Agreement and Plan of Reorganization requires that, in order
to bind all holders of shares of California Intermediate Tax Free Fund to
the foregoing transactions, and in particular to bind such holders to the
exchange of their California Intermediate Tax Free Fund shares for
California Tax Free Fund shares, it is necessary to adopt an amendment to
the Corporation's Amended and Restated Articles of Incorporation.
NOW, THEREFORE, BE IT RESOLVED, that the Corporation's Amended and Restated
Articles of Incorporation be, and the same hereby are, amended to add the
following Article IV(R) immediately following Article IV(Q) thereof:
ARTICLE IV(R). (a) For purposes of this Article IV(R), the following
terms shall have the following meanings:
"Corporation" means this corporation.
"Acquired Fund" means the Corporation's California Intermediate Tax
Free Fund, which is represented by the Corporation's Class Y shares.
"Class A Acquired Fund Shares" means the Corporation's Class Y Common
Shares.
"Class Y Acquired Fund Shares" means the Corporation's Class Y Series
2 Common Shares.
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"Acquiring Fund" means the Corporation's California Tax Free Fund,
which is represented by the Corporation's Class II shares.
"Class A Acquiring Fund Shares" means the Corporation's Class II
Common Shares.
"Class Y Acquiring Fund Shares" means the Corporation's Class II,
Series 3 Common Shares.
"Effective Time" means 4:00 p.m. Eastern time on the date upon which
these Articles of Amendment are filed with the Maryland State
Department of Assessments and Taxation.
(b) At the Effective Time, the assets belonging to the Acquired Fund,
the liabilities belonging to the Acquired Fund, and the General Assets and
General Liabilities allocated to the Acquired Fund, shall become, without
further action, assets belonging to the Acquiring Fund, liabilities
belonging to the Acquiring Fund, and General Assets and General Liabilities
allocated to the Acquiring Fund. For purposes of the foregoing, the terms
"assets belonging to," "liabilities belonging to," "General Assets" and
"General Liabilities" have the meanings assigned to them in Article IV,
Section 1(d)(i) and (ii) of the Corporation's Amended and Restated Articles
of Incorporation.
(c) At the Effective Time, each issued and outstanding Acquired Fund
share shall be, without further action, exchanged for those numbers and
classes of Acquiring Fund shares calculated in accordance with paragraph
(d) below.
(d) The numbers of Class A and Class Y Acquiring Fund Shares to be
issued in exchange for the Class A and Class Y Acquired Fund Shares shall
be determined as follows:
(i) The net asset value per share of the Acquired Fund's and the
Acquiring Fund's Class A Shares and Class Y Shares shall be computed
as of the Effective Time using the valuation procedures set forth in
the Corporation's articles of incorporation and bylaws and
then-current Prospectuses and Statement of Additional Information and
as may be required by the Investment Company Act of 1940, as amended
(the "1940 Act").
(ii) The total number of Class A Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Class
A Acquired Fund Shares shall be determined as of the Effective Time by
multiplying the number of Class A Acquired Fund Shares outstanding
immediately prior to the Effective Time times a fraction, the
numerator of which is the net asset value per share of Class A
Acquired Fund Shares immediately prior to the Effective Time, and the
denominator of which is the net asset value per share of the Class A
Acquiring Fund Shares immediately prior to the Effective Time, each as
determined pursuant to (i) above.
(iii) The total number of Class Y Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Class
Y Acquired Fund Shares shall be determined as of the Effective Time by
multiplying the number of Class Y Acquired Fund Shares outstanding
immediately prior to the Effective Time times a fraction, the
numerator of which is the net asset value per share of Class Y
Acquired Fund Shares immediately prior to the Effective Time, and the
denominator of which is the net asset value per share of the Class Y
Acquiring Fund Shares immediately prior to the Effective Time, each as
determined pursuant to (i) above.
A-16
(iv) At the Effective Time, the Acquired Fund shall issue and
distribute to the Acquired Fund shareholders of the respective classes
pro rata within such classes (based upon the ratio that the number of
Acquired Fund shares of the respective classes owned by each Acquired
Fund shareholder immediately prior to the Effective Time bears to the
total number of issued and outstanding Acquired Fund shares of the
respective classes immediately prior to the Effective Time) the full
and fractional Acquiring Fund shares of the respective classes issued
by the Acquiring Fund pursuant to (ii) and (iii) above. Accordingly,
each Class A Acquired Fund shareholder shall receive, at the Effective
Time, Class A Acquiring Fund Shares with an aggregate net asset value
equal to the aggregate net asset value of the Class A Acquired Fund
Shares owned by such Acquired Fund shareholder immediately prior to
the Effective Time; and each Class Y Acquired Fund shareholder shall
receive, at the Effective Time, Class Y Acquiring Fund Shares with an
aggregate net asset value equal to the aggregate net asset value of
the Class Y Acquired Fund Shares owned by such Acquired Fund
shareholder immediately prior to the Effective Time.
(e) The distribution of Acquiring Fund shares to Acquired Fund
shareholders provided for in paragraphs (c) and (d) above shall be
accomplished by the issuance of such Acquiring Fund shares to open accounts
on the share records of the Acquiring Fund in the names of the Acquired
Fund shareholders representing the numbers and classes of Acquiring Fund
shares due each such shareholder pursuant to the foregoing provisions. All
issued and outstanding shares of the Acquired Fund shall simultaneously be
cancelled on the books of the Acquired Fund and retired. From and after the
Effective Time, share certificates formerly representing Acquired Fund
shares shall represent the numbers and classes of Acquiring Fund shares
determined in accordance with the foregoing provisions.
(f) From and after the Effective Time, the Acquired Fund shares
cancelled and retired pursuant to paragraph (e) above shall have the status
of authorized and unissued Class Y common shares of the Corporation,
without designation as to series.
WHEREAS, the Corporation is registered as an open-end management investment
company (i.e., a mutual fund) under the Investment Company Act of 1940 and
offers its shares to the public in several classes, each of which
represents a separate and distinct portfolio of assets;
WHEREAS, it is desirable and in the best interests of the holders of the
Class N shares of the Corporation (also known as "Colorado Intermediate Tax
Free Fund") that the assets belonging to such class be sold to a separate
portfolio of the Corporation which is known as "Colorado Tax Free Fund" and
which is represented by the Corporation's Class KK shares, in exchange for
shares of Colorado Tax Free Fund which are to be delivered to former
Colorado Intermediate Tax Free Fund holders;
WHEREAS, Colorado Intermediate Tax Free Fund and Colorado Tax Free Fund
have entered into an Agreement and Plan of Reorganization providing for the
foregoing transactions; and
WHEREAS, the Agreement and Plan of Reorganization requires that, in order
to bind all holders of shares of Colorado Intermediate Tax Free Fund to the
foregoing transactions, and in particular to bind such holders to the
exchange of their Colorado Intermediate Tax Free Fund shares for Colorado
Tax Free Fund shares, it is necessary to adopt an amendment to the
Corporation's Amended and Restated Articles of Incorporation.
A-17
NOW, THEREFORE, BE IT RESOLVED, that the Corporation's Amended and Restated
Articles of Incorporation be, and the same hereby are, amended to add the
following Article IV(S) immediately following Article IV(R) thereof:
ARTICLE IV(S). (a) For purposes of this Article IV(S), the following
terms shall have the following meanings:
"Corporation" means this corporation.
"Acquired Fund" means the Corporation's Colorado Intermediate Tax Free
Fund, which is represented by the Corporation's Class N shares.
"Class A Acquired Fund Shares" means the Corporation's Class N Common
Shares.
"Class Y Acquired Fund Shares" means the Corporation's Class N Series
2 Common Shares.
"Acquiring Fund" means the Corporation's Colorado Tax Free Fund, which
is represented by the Corporation's Class KK shares.
"Class A Acquiring Fund Shares" means the Corporation's Class KK
Common Shares.
"Class Y Acquiring Fund Shares" means the Corporation's Class KK,
Series 3 Common Shares.
"Effective Time" means 4:00 p.m. Eastern time on the date upon which
these Articles of Amendment are filed with the Maryland State
Department of Assessments and Taxation.
(b) At the Effective Time, the assets belonging to the Acquired Fund,
the liabilities belonging to the Acquired Fund, and the General Assets and
General Liabilities allocated to the Acquired Fund, shall become, without
further action, assets belonging to the Acquiring Fund, liabilities
belonging to the Acquiring Fund, and General Assets and General Liabilities
allocated to the Acquiring Fund. For purposes of the foregoing, the terms
"assets belonging to," "liabilities belonging to," "General Assets" and
"General Liabilities" have the meanings assigned to them in Article IV,
Section 1(d)(i) and (ii) of the Corporation's Amended and Restated Articles
of Incorporation.
(c) At the Effective Time, each issued and outstanding Acquired Fund
share shall be, without further action, exchanged for those numbers and
classes of Acquiring Fund shares calculated in accordance with paragraph
(d) below.
(d) The numbers of Class A and Class Y Acquiring Fund Shares to be
issued in exchange for the Class A and Class Y Acquired Fund Shares shall
be determined as follows:
(i) The net asset value per share of the Acquired Fund's and the
Acquiring Fund's Class A Shares and Class Y Shares shall be computed
as of the Effective Time using the valuation procedures set forth in
the Corporation's articles of incorporation and bylaws and
then-current Prospectuses and Statement of Additional Information and
as may be required by the Investment Company Act of 1940, as amended
(the "1940 Act").
A-18
(ii) The total number of Class A Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Class
A Acquired Fund Shares shall be determined as of the Effective Time by
multiplying the number of Class A Acquired Fund Shares outstanding
immediately prior to the Effective Time times a fraction, the
numerator of which is the net asset value per share of Class A
Acquired Fund Shares immediately prior to the Effective Time, and the
denominator of which is the net asset value per share of the Class A
Acquiring Fund Shares immediately prior to the Effective Time, each as
determined pursuant to (i) above.
(iii) The total number of Class Y Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Class
Y Acquired Fund Shares shall be determined as of the Effective Time by
multiplying the number of Class Y Acquired Fund Shares outstanding
immediately prior to the Effective Time times a fraction, the
numerator of which is the net asset value per share of Class Y
Acquired Fund Shares immediately prior to the Effective Time, and the
denominator of which is the net asset value per share of the Class Y
Acquiring Fund Shares immediately prior to the Effective Time, each as
determined pursuant to (i) above.
(iv) At the Effective Time, the Acquired Fund shall issue and
distribute to the Acquired Fund shareholders of the respective classes
pro rata within such classes (based upon the ratio that the number of
Acquired Fund shares of the respective classes owned by each Acquired
Fund shareholder immediately prior to the Effective Time bears to the
total number of issued and outstanding Acquired Fund shares of the
respective classes immediately prior to the Effective Time) the full
and fractional Acquiring Fund shares of the respective classes issued
by the Acquiring Fund pursuant to (ii) and (iii) above. Accordingly,
each Class A Acquired Fund shareholder shall receive, at the Effective
Time, Class A Acquiring Fund Shares with an aggregate net asset value
equal to the aggregate net asset value of the Class A Acquired Fund
Shares owned by such Acquired Fund shareholder immediately prior to
the Effective Time; and each Class Y Acquired Fund shareholder shall
receive, at the Effective Time, Class Y Acquiring Fund Shares with an
aggregate net asset value equal to the aggregate net asset value of
the Class Y Acquired Fund Shares owned by such Acquired Fund
shareholder immediately prior to the Effective Time.
(e) The distribution of Acquiring Fund shares to Acquired Fund
shareholders provided for in paragraphs (c) and (d) above shall be
accomplished by the issuance of such Acquiring Fund shares to open accounts
on the share records of the Acquiring Fund in the names of the Acquired
Fund shareholders representing the numbers and classes of Acquiring Fund
shares due each such shareholder pursuant to the foregoing provisions. All
issued and outstanding shares of the Acquired Fund shall simultaneously be
cancelled on the books of the Acquired Fund and retired. From and after the
Effective Time, share certificates formerly representing Acquired Fund
shares shall represent the numbers and classes of Acquiring Fund shares
determined in accordance with the foregoing provisions.
(f) From and after the Effective Time, the Acquired Fund shares
cancelled and retired pursuant to paragraph (e) above shall have the status
of authorized and unissued Class N common shares of the Corporation,
without designation as to series.
The undersigned officer of the Corporation hereby acknowledges, in the name
and on behalf of the Corporation, the foregoing Articles of Amendment to be the
corporate act of the Corporation and further certifies that, to the best of his
or her knowledge, information and belief, the matters and facts set
A-19
forth therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed in its name and on its behalf by its President or a Vice President
and witnessed by its Secretary or an Assistant Secretary on this ____ day of
December, 2008.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By
------------------------------------
Its
------------------------------------
Witness:
-------------------------------------
[Assistant] Secretary
A-20
PART B
FORM N-14
FIRST AMERICAN INVESTMENT FUNDS, INC.
800 Nicollet Mall
Minneapolis, MN 55402
(800) 677-3863
Statement of Additional Information
November 17, 2008
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Prospectus/Proxy
Statement dated November 17, 2008, relating to the proposed reorganizations of
California Intermediate Tax Free Fund and Colorado Intermediate Tax Free Fund
(each an "Acquired Fund"), each a separate series of First American Investments
Funds, Inc. ("FAIF"), with and into California Tax Free Fund and Colorado Tax
Free Fund, respectively (each an "Acquiring Fund"), each of which is also a
separate series of FAIF. A copy of the Prospectus/Proxy Statement may be
obtained without charge by calling or writing to FAIF at the telephone number or
address set forth above. This Statement of Additional Information has been
incorporated by reference into the Prospectus/Proxy Statement.
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Prospectus/Proxy
Statement.
Further information about the Acquired Funds and the Acquiring Funds is
contained in their Prospectuses, each dated October 28, 2008, and any
supplements, their Statement of Additional Information dated October 28, 2008,
as supplemented ("SAI"), and their Annual Report to Shareholders for the fiscal
year ended June 30, 2008 ("Annual Report").
This Statement of Additional Information incorporates by reference the SAI
and the Annual Report, each of which accompanies this Statement of Additional
Information.
TABLE OF CONTENTS
I. Unaudited Pro Forma Financial Statements .......................... [B-1]
I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Set forth on the following pages are unaudited pro forma financial
statements which are presented to show the effect of (a) the proposed
acquisition of California Intermediate Tax Free Fund by California Tax Free Fund
and (b) the proposed acquisition of Colorado Intermediate Tax Free Fund by
Colorado Tax Free Fund, in each case as if such acquisition had taken place as
of the close of business on June 30, 2008.
B-1
First American California Tax Free Fund
Unaudited Pro Forma Statements of ASSETS AND LIABILITIES
June 30, 2008, all dollars and shares are rounded to thousands (000), except per
share data
CALIFORNIA
INTERMEDIATE TAX CALIFORNIA TAX UNAUDITED UNAUDITED
FREE FUND, FREE FUND, PRO FORMA PRO FORMA
ACQUIRED FUND ACQUIRING FUND ADJUSTMENTS COMBINED
----------------- -------------- ----------- ---------
Unaffiliated investments, at cost $56,686 $44,878 $ -- $101,564
ASSETS:
Unaffiliated investments, at value $56,745 $44,627 $ -- $101,372
Receivable for dividends and interest 693 602 -- 1,295
Receivable for capital shares sold 188 234 -- 422
Receivable from advisor -- 9 -- 9
Prepaid expenses and other assets 1 1 -- 2
------- ------- ----- --------
Total assets 57,627 45,473 -- 103,100
======= ======= ===== ========
LIABILITIES:
Bank overdraft 3 1 -- 4
Dividends payable 172 122 -- 294
Payable for investments purchased -- 259 -- 259
Payable for capital shares redeemed 10 -- -- 10
Payable to affiliates 29 21 -- 50
Payable for distribution and
shareholder servicing fees -- 3 -- 3
Accrued expenses and other liabilities 26 26 -- 52
------- ------- ----- --------
Total liabilities 240 432 -- 672
------- ------- ----- --------
Net assets 57,387 45,041 -- 102,428
======= ======= ===== ========
COMPOSITION OF NET ASSETS:
Portfolio capital 57,016 45,292 -- 102,308
Undistributed net investment income 5 1 -- 6
Accumulated net realized gain (loss)
on investments 307 (1) -- 306
Net unrealized appreciation
(depreciation) of investments 59 (251) -- (192)
------- ------- ----- --------
Net assets $57,387 $45,041 $ -- $102,428
======= ======= ===== ========
Class A:
Net assets $ 4,463 $12,076 $ -- $ 16,539
Shares issued and outstanding (1) 447 1,128 (30) 1,545
Net asset value and redemption price
per share $ 9.99 $ 10.71 $ -- $ 10.71
Maximum offering price per share (2) $ 10.22 $ 11.19 $ -- $ 11.19
Class C:
Net assets $ N/A $ 2,480 $ -- $ 2,480
Shares issued and outstanding (1) N/A 231 -- 231
Net asset value, offering price, and
redemption price per share (3) $ N/A $ 10.72 $ -- $ 10.72
Class Y:
Net assets $52,924 $30,485 $ -- $ 83,409
Shares issued and outstanding (1) 5,284 2,847 (342) 7,789
Net asset value, offering price, and
redemption price per share $ 10.02 $ 10.71 $ -- $ 10.71
B-2
(1) $0.0001 par value - 2 billion authorized for each class
(2) The offering price is calculated by dividing the net asset value by 1 minus
the maximum sales charge
(3) Class C has a contingent deferred sales charge.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-3
First American California Tax Free Fund
Unaudited Pro Forma Statement of OPERATIONS
For the Year Ended June 30, 2008, all dollars are rounded to thousands (000)
CALIFORNIA
INTERMEDIATE TAX CALIFORNIA TAX UNAUDITED UNAUDITED
FREE FUND, FREE FUND, PRO FORMA PRO FORMA
ACQUIRED FUND ACQUIRING FUND ADJUSTMENTS COMBINED
----------------- -------------- ----------- ---------
INVESTMENT INCOME:
Interest from unaffiliated securities $2,567 $ 1,913 $ -- $ 4,480
Dividends from unaffiliate money
market funds $ 29 $ 31 $ -- $ 60
------ ------- ----- -------
Total investment income 2,596 1,944 -- 4,540
EXPENSES:
Investment advisory fees 286 200 -- 486
Administration fees 134 96 (6)A 224
Transfer agent fees 60 83 (59)B 84
Custodian fees 3 2 -- 5
Legal fees 13 13 (11)C 15
Audit fees 33 33 (33)D 33
Registration fees 5 6 (5)E 6
Postage and printing fees 4 3 -- 7
Directors' fees 27 27 (23)F 31
Other expenses 16 16 (16)G 16
Distribution and shareholder servicing
fees - Class A 14 28 -- 42
Distribution and shareholder servicing
fees - Class C -- 10 -- 10
------ ------- ----- -------
Total expenses 595 517 (153) 959
Less: Fee waivers (194) (289) 44 H (439)
Less: Indirect payments from custodian -- -- -- --
------ ------- ----- -------
Total net expenses 401 228 (109) 520
------ ------- ----- -------
Investment income - net $2,195 $ 1,716 $ 109 $ 4,020
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS - NET:
Net realized gain (loss) on investments $ 328 $ (1) $ -- $ 327
Net change in unrealized appreciation
or depreciation of investments (702) (1,044) -- (1,746)
------ ------- ----- -------
Net gain (loss) on investments (374) (1,045) -- (1,419)
------ ------- ----- -------
Net increase in net assets resulting
from operations $1,821 $ 671 $ 109 $ 2,601
====== ======= ===== =======
A To reflect a reduction in administration fees due to the merger.
B To reflect a reduction in transfer agent fees due to the merger.
C To reflect a reduction in legal fees due to the merger.
D To reflect a reduction in audit fees due to the merger.
B-4
E To reflect a reduction in registration fees due to the merger.
F To reflect a reduction in Directors' compensation due to the merger.
G To reflect a reduction in other expenses due to the merger.
H To adjust the expense reimbursement to reflect the net reduction in fees
resulting from the merger per the agreement by FAF Advisors, Inc. and its
affiliates to waive fees and reimburse other fund expenses following the
merger.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-5
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
MUNICIPAL BONDS - 94.4%
REVENUE BONDS - 68.9%
CONTINUING CARE RETIREMENT COMMUNITIES - 2.0%
Association of Bay Area Governments Finance
Authority, Lincoln Glen Manor Senior
Citizens (CMI)
6.100%, 02/15/2025 $ -- $ -- $ 250 $ 253 $ 250 $ 253
California Health Facilities Financing
Authority, Paradise Valley Estates (CMI)
4.375%, 01/01/2012 540 551 -- -- 540 551
California Statewide Communities Development
Authority, Los Angeles Jewish Home (CMI)
5.000%, 11/15/2012 500 524 -- -- 500 524
Illinois Finance Authority, Franciscan
Communities, Series A
5.500%, 05/15/2027 -- -- 300 265 300 265
La Verne, Brethren Hillcrest Homes,
Series B (ACA)
5.600%, 02/15/2033 500 438 -- -- 500 438
---------- ------- ---------- ------- ---------- --------
1,540 1,513 550 518 2,090 2,031
---------- ------- ---------- ------- ---------- --------
ECONOMIC DEVELOPMENT - 1.0%
Port of Oakland, Series B (MBIA)
5.000%, 11/01/2018 1,000 1,040 -- -- 1,000 1,040
---------- ------- ---------- ------- ---------- --------
EDUCATION - 11.1%
Association of Bay Area Governments Financial
Authority, Schools of the Sacred Heart,
Series A, Escrowed to Maturity
5.900%, 06/01/2010 (a) -- -- 200 212 200 212
California Educational Facilities Authority,
Claremont Graduate University, Series A
5.000%, 03/01/2020 240 244 -- -- 240 244
California Educational Facilities Authority,
Golden Gate University
5.000%, 10/01/2020 505 482 -- -- 505 482
California Educational Facilities Authority,
Lutheran University, Series C
4.750%, 10/01/2015 675 670 -- -- 675 670
California Educational Facilities Authority,
Series B, Escrowed to Maturity
6.000%, 06/01/2010 (a) 85 90 -- -- 85 90
6.000%, 06/01/2010 (a) 410 435 -- -- 410 435
California Educational Facilities Authority,
Series B, Pre-refunded 06/01/2010 @ 101
B-6
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
6.625%, 06/01/2020 (b) -- -- 35 38 35 38
6.625%, 06/01/2020 (b) -- -- 180 194 180 194
California Educational Facilities Authority,
University of Redlands, Series A
5.000%, 10/01/2020 500 505 500 505 1,000 1,010
5.000%, 08/01/2028 500 479 500 478 1,000 957
California Educational Facilities Authority,
University of the Pacific
5.000%, 11/01/2015 300 317 -- -- 300 317
5.000%, 11/01/2030 -- -- 1,000 987 1,000 987
California Educational Facilities Authority,
Woodbury University
4.400%, 01/01/2015 450 434 -- -- 450 434
4.500%, 01/01/2016 -- -- 470 451 470 451
California Municipal Finance Authority, Biola
University
5.000%, 10/01/2018 800 786 200 196 1,000 982
5.625%, 10/01/2023 -- -- 500 503 500 503
California Municipal Finance Authority,
Education Revenue, American Heritage
Education Foundation Project, Series A
5.250%, 06/01/2026 -- -- 400 366 400 366
California Municipal Finance Authority,
Loma Linda University
4.250%, 04/01/2018 300 292 -- -- 300 292
4.375%, 04/01/2019 -- -- 300 293 300 293
California State Higher Educational
Facilities Authority, Fresno Pacific
University, Series A
6.750%, 03/01/2019 -- -- 380 392 380 392
California State Higher Educational
Facilities Authority, University of
Redlands, Series A, Escrowed to Maturity
5.550%, 06/01/2009 (a) 225 233 -- -- 225 233
California State Higher Educational
Facilities Authority, University of
Redlands, Series A,Pre-refunded 06/01/2010
@ 101
5.700%, 06/01/2011 (b) 250 266 -- -- 250 266
5.750%, 06/01/2012 (b) 260 277 -- -- 260 277
5.950%, 06/01/2015 (b) -- -- 310 332 310 332
California Statewide Communities Development
Authority, Viewpoint Schools (ACA)
4.125%, 10/01/2014 405 381 -- -- 405 381
California State University Foundation,
Monterey Bay, Pre-refunded 06/01/2011
@ 100 (MBIA)
5.300%, 06/01/2022 (b) -- -- 500 534 500 534
---------- ------- ---------- ------- ---------- --------
5,905 5,891 5,475 5,481 11,380 11,372
---------- ------- ---------- ------- ---------- --------
HEALTHCARE - 17.5%
B-7
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Association of Bay Area Governments Financial
Authority, Children's Hospital, Series A
4.500%, 12/01/2019 425 402 -- -- 425 402
4.750%, 12/01/2022 -- -- 350 333 350 333
California Health Facilities Financing
Authority, Casa Colina
5.500%, 04/01/2013 300 308 50 51 350 359
California Health Facilities Financing
Authority, Catholic Healthcare West,
Series G 5.500%, 07/01/2025 1,000 1,016 -- -- 1,000 1,016
California Health Facilities Financing
Authority, Catholic Healthcare West,
Series I, Mandatory Put 07/01/2014 @ 100
4.950%, 07/01/2026 450 463 -- -- 450 463
California Health Facilities Financing
Authority, Marshall Medical Center,
Series A (CMI)
4.750%, 11/01/2019 1,200 1,204 560 562 1,760 1,766
California Health Facilities Financing
Authority, Sutter Health, Series A
5.000%, 08/15/2038 -- -- 250 238 250 238
California Health Facilities Financing
Authority, Valleycare Medical Center,
Series A, Pre-refunded 05/01/2012 @
100 (CMI)
4.625%, 05/01/2013 (b) 300 315 -- -- 300 315
California Statewide Communities Development
Authority, Adventist Health, Series A
5.000%, 03/01/2030 -- -- 300 286 300 286
California Statewide Communities Development
Authority, Catholic Healthcare West, Series C
5.625%, 07/01/2035 -- -- 1,000 1,002 1,000 1,002
California Statewide Communities Development
Authority, Daughters of Charity Healthcare,
Series A
5.250%, 07/01/2030 -- -- 100 93 100 93
California Statewide Communities Development
Authority, Daughters of Charity Health,
Series G
5.250%, 07/01/2013 500 511 -- -- 500 511
California Statewide Communities Development
Authority, Elder Care Alliance, Series A,
Escrowed to Maturity
7.250%, 11/15/2011 (a) 355 380 180 193 535 573
California Statewide Communities Development
Authority, Henry Mayo Newhall Memorial
Hospital (CMI)
5.000%, 10/01/2020 500 504 -- -- 500 504
5.000%, 10/01/2027 -- -- 400 394 400 394
B-8
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
California Statewide Communities Development
Authority, Henry Mayo Newhall Memorial,
Series B (AMBAC) (CMI)
5.200%, 10/01/2037 -- -- 500 489 500 489
California Statewide Communities Development
Authority, Jewish Home (CMI)
4.500%, 11/15/2019 -- -- 560 536 560 536
5.000%, 11/15/2037 -- -- 500 468 500 468
California Statewide Communities Development
Authority, Kaiser Permanente, Series C,
Mandatory Put 06/01/2012 @ 100
3.850%, 11/01/2029 1,000 995 -- -- 1,000 995
California Statewide Communities Development
Authority, Redlands Community Hospital,
Series A (RAAI)
5.000%, 04/01/2015 -- -- 500 507 500 507
California Statewide Communities Development
Authority, St. Joseph, Series B (FGIC)
5.500%, 07/01/2027 250 254 850 865 1,100 1,119
California Statewide Communities Development
Authority, St. Joseph, Series C (FGIC)
5.500%, 07/01/2027 500 509 -- -- 500 509
Loma Linda University Medical Center,
Hospital Revenue, Series A
5.000%, 12/01/2015 600 609 400 406 1,000 1,015
Marysville Hospital, Fremont Rideout Health
Project, Series A (AMBAC)
5.000%, 01/01/2010 500 514 -- -- 500 514
Puerto Rico Industrial, Tourist, Educational,
Medical & Environmental Control
Facilities, Hospital de la Concepcion,
Series A
5.500%, 11/15/2009 650 671 -- -- 650 671
Sierra View Health Care District
5.250%, 07/01/2024 500 488 500 488 1,000 976
5.300%, 07/01/2026 -- -- 1,000 973 1,000 973
Turlock California Health Facilities Revenue,
Emanuel Medical Center
5.000%, 10/15/2024 700 636 300 272 1,000 908
---------- ------- ---------- ------- ---------- --------
9,730 9,779 8,300 8,156 18,030 17,935
---------- ------- ---------- ------- ---------- --------
HOUSING - 2.7%
Aztec Shops, California State Auxiliary
Organization, San Diego State University
5.400%, 09/01/2011 1,035 1,064 -- -- 1,035 1,064
California State Department of Veterans
Affairs, Series C (AMT)
5.500%, 12/01/2019 -- -- 180 182 180 182
B-9
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
California Rural Home Mortgage Finance
Authority, Single Family Mortgage, Series
B (AMT) (FNMA) (GNMA)
5.650%, 06/01/2010 -- -- 5 5 5 5
California Rural Home Mortgage Finance
Authority, Single Family Mortgage, Series
D (AMT) (FNMA) (GNMA)
5.250%, 06/01/2010 5 5 -- -- 5 5
California Statewide Communities Development
Authority, Equity Residential, Series B,
Mandatory Put 06/15/2009 @ 100
5.200%, 12/01/2029 500 500 -- -- 500 500
Ventura County Area Housing Authority, Mira
Vista Senior Apartments, Series A (AMBAC)
(AMT)
5.150%, 12/01/2031 -- -- 1,000 961 1,000 961
---------- ------- ---------- ------- ---------- --------
1,540 1,569 1,185 1,148 2,725 2,717
---------- ------- ---------- ------- ---------- --------
LEASE REVENUE - 7.7%
Apple Valley Public Financing Authority,
Lease Revenue, Town Hall Annex Project,
Series A (AMBAC)
4.500%, 09/01/2017 535 538 -- -- 535 538
5.000%, 09/01/2027 -- -- 500 491 500 491
California State Public Works Board,
California Community Colleges, Series A
4.875%, 12/01/2018 200 203 -- -- 200 203
California State Public Works Board,
California Community Colleges, Series B
5.500%, 06/01/2019 -- -- 1,035 1,098 1,035 1,098
California State Public Works Board,
Department of Corrections &
Rehabilitation, Series F (FGIC)
5.000%, 11/01/2016 1,500 1,574 -- -- 1,500 1,574
California State Public Works Board,
Department of Health Services, Series A
(MBIA)
5.200%, 11/01/2012 500 515 -- -- 500 515
California State Public Works Board,
Department of Mental Health, Series A
5.500%, 06/01/2016 540 584 -- -- 540 584
Golden State Tobacco Securitization
Corporation, California Tobacco
Settlement, Convertible CABs, Series A
(FSA)
0.000% through 06/01/2010, thereafter
4.550%, 06/01/2022 (c) 150 125 1,750 1,466 1,900 1,591
Los Angeles Community Redevelopment Agency,
Lease Revenue, Manchester Social Services
Project (AMBAC)
5.000%, 09/01/2016 1,200 1,255 -- -- 1,200 1,255
---------- ------- ---------- ------- ---------- --------
4,625 4,794 3,285 3,055 7,910 7,849
---------- ------- ---------- ------- ---------- --------
MISCELLANEOUS -5.1%
California Infrastructure & Economic
Development, Salvation Army Western
(AMBAC)
B-10
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
4.000%, 09/01/2018 1,000 973 -- -- 1,000 973
California Infrastructure & Economic
Development Bank, Walt Disney Family
Museum
5.250%, 02/01/2033 -- -- 200 201 200 201
Golden West Schools Financing Authority,
Series A (MBIA)
5.700%, 02/01/2013 720 788 -- -- 720 788
5.750%, 02/01/2014 520 576 250 277 770 853
5.800%, 08/01/2022 -- -- 320 366 320 366
5.800%, 08/01/2023 -- -- 345 395 345 395
Golden West Schools Financing Authority,
Series A, Zero Coupon Bond (MBIA)
4.017%, 02/01/2012 (d) 535 464 -- -- 535 464
Sacramento City Financing Authority,
Pre-refunded 06/01/2010 @ 101
5.400%, 06/01/2018 (b) -- -- 455 483 455 483
5.500%, 06/01/2023 (b) -- -- 645 687 645 687
---------- ------- ---------- ------- ---------- --------
2,775 2,801 2,215 2,409 4,990 5,210
---------- ------- ---------- ------- ---------- --------
RECREATIONAL FACILITY AUTHORITY - 1.3%
California Infrastructure & Economic
Development, Performing Arts Center
4.000%, 12/01/2015 220 221 -- -- 220 221
California State University Fresno
Association, Auxiliary Organization Event
Center, Pre-refunded 07/01/2012 @ 101
6.000%, 07/01/2022 (b) 500 555 500 555 1,000 1,110
---------- ------- ---------- ------- ---------- --------
720 776 500 555 1,220 1,331
---------- ------- ---------- ------- ---------- --------
TAX REVENUE - 10.6%
Antioch Area Public Facilities Financing
Agency, Special Tax, Community Facilities
District #1989-1 (AMBAC)
4.000%, 08/01/2018 1,000 970 -- -- 1,000 970
Corona Redevelopment Agency, Tax Allocation,
Temescal Canyon Project Area, Series A
(AGTY)
4.125%, 11/01/2017 205 207 -- -- 205 207
Fortuna Public Financing Authority (AGTY)
5.000%, 11/01/2038 -- -- 500 501 500 501
Grass Valley Community Redevelopment Agency,
Tax Allocation
6.400%, 12/01/2034 -- -- 400 411 400 411
Long Beach Community Facilities District #5,
Towne Center Special Tax,
Pre-refunded 10/01/2008 @ 100
6.100%, 10/01/2012 (b) 165 167 250 252 415 419
Los Angeles
5.625%, 03/01/2019 -- -- 200 209 200 209
B-11
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Los Angeles County Community Facilities
District #3, Special Tax, Series A (AMBAC)
5.250%, 09/01/2018 -- -- 715 738 715 738
Murrieta Community Facilities District #2,
The Oaks Area
5.750%, 09/01/2020 250 249 125 124 375 373
Norco, Special Tax, Community Facilities
District #97-1 (AGTY)
4.500%, 10/01/2016 260 270 -- -- 260 270
4.875%, 10/01/2030 -- -- 500 500 500 500
Palm Desert Financing Authority, Tax
Allocation Revenue, Project Area #4,
Series A (MBIA)
4.750%, 10/01/2013 500 522 -- -- 500 522
5.000%, 10/01/2029 -- -- 1,000 986 1,000 986
Poway Unified School District, Special Tax,
Community Facilities District #6-4
5.000%, 09/01/2023 400 384 250 240 650 624
Rancho Cucamonga Redevelopment Agency,
Series A (MBIA)
4.125%, 09/01/2018 310 301 -- -- 310 301
5.000%, 09/01/2034 -- -- 500 487 500 487
San Bernardino Redevelopment Agency, Tax
Allocation Revenue, San Sevaine
Redevelopment Project, Series A (RAAI)
5.000%, 09/01/2016 500 499 350 350 850 849
San Francisco City & County Redevelopment
Financing Authority, Tax Allocation
Revenue, Mission Bay North Redevelopment
Project, Series B (RAAI)
4.000%, 08/01/2012 295 291 -- -- 295 291
4.100%, 08/01/2014 325 316 -- -- 325 316
4.250%, 08/01/2016 250 239 -- -- 250 239
4.375%, 08/01/2018 -- -- 380 357 380 357
Sand City Redevelopment Agency Tax Allocation
Revenue, Series A (AGTY)
4.000%, 11/01/2019 315 313 -- -- 315 313
Soledad Redevelopment Agency, Tax Allocation
Revenue, Series A (XLCA)
4.500%, 12/01/2016 205 206 -- -- 205 206
South Tahoe Redevelopment Agency, Special
Tax, Community Facilities District #2001-1
4.400%, 10/01/2015 -- -- 120 116 120 116
4.500%, 10/01/2016 -- -- 125 116 125 116
4.600%, 10/01/2018 280 251 -- -- 280 251
Stockton Public Financing Revenue, Assessment
Districts, Senior Lien, Series A (RAAI)
4.375%, 09/02/2020 -- -- 365 335 365 335
---------- ------- ---------- -------
B-12
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
5,260 5,185 5,780 5,722 11,040 10,907
---------- ------- ---------- ------- ---------- ---------
TRANSPORTATION-- 1.1%
Alameda Corridor Transportation Authority,
Zero Coupon Bond (AMBAC)
4.570%, 10/01/2014 (d) 1,000 754 -- -- 1,000 754
Puerto Rico Commonwealth Highway &
Transportation Authority, Series X (MBIA)
5.500%, 07/01/2015 -- -- 100 105 100 105
San Francisco Airport Commission, SFO Fuel
Company (AMT) (FSA)
5.625%, 01/01/2012 -- -- 250 255 250 255
---------- ------- ---------- ------- ---------- ---------
1,000 754 350 360 1,350 1,114
---------- ------- ---------- ------- ---------- ---------
UTILITIES - 8.8%
Banning Water Utility Authority, Enterprise
Revenue, Referendum and Improvement
Projects (FGIC)
5.000%, 11/01/2020 1,025 1,034 -- -- 1,025 1,034
Banning Water Utility Authority, Enterprise
Revenue, Referendum and Improvement
Projects (FGIC)
5.000%, 11/01/2023 -- -- 1,040 1,034 1,040 1,034
California Municipal Financial Authority,
Solid Waste Disposal Revenue, Waste
Management Incorporated Project, Mandatory
Put 09/01/2009 @ 100 (AMT)
4.100%, 09/01/2014 750 748 -- -- 750 748
California Pollution Control Financing
Authority, Solid Waste Disposal Revenue,
Waste Management Incorporated Project,
Series A-2 (AMT)
5.400%, 04/01/2025 -- -- 500 461 500 461
California Pollution Control Financing
Authority, Solid Waste Disposal Revenue,
Waste Management Incorporated Project,
Series B (AMT)
5.000%, 07/01/2027 250 217 250 217 500 434
California Statewide Communities Development
Authority, Pollution Control Revenue,
Southern California Edison Company,
Series A, Mandatory Put 04/01/2013 @ 100
(XLCA)
4.100%, 04/01/2028 500 489 -- -- 500 489
California Statewide Communities Development
Authority, Water Revenue, Series B (FSA)
4.250%, 10/01/2017 285 289 -- -- 285 289
Chino Basin Regional Financing Authority,
Inland Empire Utility Agency Sewer
Project, Pre-refunded 11/01/2009 @ 101
(MBIA)
5.200%, 11/01/2011 (b) 405 425 -- -- 405 425
Compton Sewer Authority (IBC) (MBIA)
5.375%, 09/01/2023 -- -- 1,150 1,176 1,150 1,176
Imperial, Wastewater Treatment Facility
(FGIC)
5.000%, 10/15/2020 1,000 1,003 -- -- 1,000 1,003
B-13
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Richmond Wastewater Systems, Pre-refunded
08/01/2009 @ 102 (FGIC)
5.200%, 08/01/2011 (b) 500 527 -- -- 500 527
Signal Hill, Water Revenue (MBIA)
4.375%, 11/01/2018 345 346 -- -- 345 346
South Bayside Waste Management Authority
(AMBAC)
5.750%, 03/01/2020 -- -- 150 155 150 155
Southern California Public Power Authority,
Natural Gas Project Revenue, Project #1,
Series A
5.250%, 11/01/2020 500 500 -- -- 500 500
Whittier Utility Authority (MBIA)
4.400%, 06/01/2017 305 311 -- -- 305 311
4.500%, 06/01/2018 65 66 -- -- 65 66
---------- ------- ---------- ------- ---------- ---------
5,930 5,955 3,090 3,043 9,020 8,998
---------- ------- ---------- ------- ---------- ---------
TOTAL REVENUE BONDS 40,025 40,057 30,730 30,447 70,755 70,504
---------- ------- ---------- ------- ---------- ---------
GENERAL OBLIGATIONS - 21.5%
Acalanes Unified High School District, Zero
Coupon Bond, Pre-refunded 08/01/2010
@ 70.92 (FGIC)
3.024%, 08/01/2016 (b) (d) -- -- 700 466 700 466
Alisal Union School District, Series C, Zero
Coupon Bond (FGIC)
2.619%, 08/01/2008 (d) 860 858 -- -- 860 858
Baldwin Park Unified School District Election
of 2002, Zero Coupon Bond (AMBAC)
5.354%, 08/01/2020 (d) 1,000 528 -- -- 1,000 528
Bassett Unified School District Election of
2006 (FSA)
5.000%, 08/01/2027 -- -- 500 516 500 516
Burlingame Elementary School District,
Series A
5.000%, 08/01/2032 -- -- 255 259 255 259
California State
5.000%, 02/01/2017 1,000 1,041 -- -- 1,000 1,041
5.000%, 02/01/2024 -- -- 700 710 700 710
5.125%, 04/01/2024 500 509 -- -- 500 509
4.500%, 08/01/2026 -- -- 500 475 500 475
California State, Pre-refunded 10/01/2010 @
100
5.250%, 10/01/2019 (b) -- -- 35 37 35 37
5.250%, 10/01/2019 (b) -- -- 105 111 105 111
5.250%, 10/01/2019 (b) -- -- 460 484 460 484
California State, Water Reservoir
Development, Series Q
4.750%, 03/01/2020 200 200 -- -- 200 200
Foothill-De Anza Community College District
6.000%, 08/01/2011 300 321 -- -- 300 321
Fresno Unified School District, Series A
(MBIA)
6.050%, 08/01/2011 500 539 -- -- 500 539
B-14
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Grant Joint Union High School District,
Capital Appreciation, Election 2006, Zero
Coupon Bond (FSA)
5.272%, 08/01/2026 (d) 650 254 -- -- 650 254
Hemet Unified School District, 2006 Election,
Series B (AGTY)
5.000%, 08/01/2030 -- -- 600 611 600 611
Jefferson Union High School District, San
Mateo County, Series A (MBIA)
6.250%, 02/01/2014 300 322 -- -- 300 322
6.250%, 08/01/2020 -- -- 460 504 460 504
Los Angeles Unified School District, Election
2002, Series B (AMBAC)
4.500%, 07/01/2025 -- -- 1,925 1,850 1,925 1,850
Los Angeles Unified School District Election
of 2005, Series C (AMBAC)
5.000%, 07/01/2015 1,000 1,072 -- -- 1,000 1,072
Los Angeles Unified School District, Series
A-1 (FSA)
4.500%, 07/01/2024 -- -- 225 222 225 222
Lucia Mar Unified School District (FGIC)
5.250%, 08/01/2022 -- -- 150 160 150 160
Oakland, Series A (MBIA)
5.000%, 01/15/2026 185 187 250 253 435 440
Palm Springs Unified School District,
Election 2004, Series B (FSA)
4.750%, 08/01/2035 -- -- 2,060 2,014 2,060 2,014
Pomona Unified School District, Series A
(MBIA)
6.150%, 08/01/2015 500 551 -- -- 500 551
5.950%, 02/01/2017 -- -- 855 908 855 908
Puerto Rico Commonwealth, Government
Development, Series B
5.000%, 12/01/2014 -- -- 200 201 200 201
Puerto Rico Commonwealth, Series B (FSA)
6.500%, 07/01/2015 1,000 1,145 -- -- 1,000 1,145
Puerto Rico Commonwealth, Series C-7 (MBIA)
6.000%, 07/01/2027 -- -- 250 261 250 261
Redondo Beach Unified School District,
Election 2008, Series A
4.250%, 08/01/2021 545 534 -- -- 545 534
Roseville Joint Union High School District,
Election of 2004, Series B (FGIC)
5.000%, 08/01/2018 550 579 -- -- 550 579
Roseville Joint Union High School District,
Series E
5.200%, 08/01/2020 600 621 -- -- 600 621
Sacramento Unified School District, Series A,
Pre-refunded 07/01/2009 @ 102
B-15
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
5.750%, 07/01/2017 (b) -- -- 400 424 400 424
San Francisco City & County Unified School
District, 2003 Election, Series C (MBIA)
4.500%, 06/15/2026 -- -- 500 472 500 472
San Mateo Unified High School District,
Series B, Zero Coupon Bond (FGIC)
4.757%, 09/01/2017 (d) 1,000 650 -- -- 1,000 650
Upland Unified School District, Election
2008, Series A (FSA)
4.000%, 08/01/2020 150 146 -- -- 150 146
Walnut Valley Unified School District,
Series A, Pre-refunded 08/01/2010 @ 102
(FSA)
5.000%, 08/01/2012 (b) 255 272 -- -- 255 272
West Covina Unified School District, Series A
(MBIA)
5.350%, 02/01/2020 770 782 -- -- 770 782
---------- ------- ---------- ------- ---------- --------
TOTAL GENERAL OBLIGATIONS 11,865 11,111 11,130 10,938 22,995 22,049
---------- ------- ---------- ------- ---------- --------
CERTIFICATES OF PARTICIPATION - 4.0%
Escondido, Series A (FGIC)
5.625%, 09/01/2020 -- -- 140 146 140 146
Escondido, Series A, Pre-refunded 09/01/2010
@ 101 (FGIC)
5.625%, 09/01/2020 (b) -- -- 160 172 160 172
Grossmont Unified High School District,
Pre-refunded 09/01/2008 @ 102 (FSA)
5.400%, 09/01/2013 (b) 300 308 -- -- 300 308
Kern County Board of Education, Series A
(MBIA)
5.200%, 05/01/2012 325 334 -- -- 325 334
Los Angeles County Schools, Regionalized
Business Services Financing Project,
Series A
5.000%, 09/01/2008 200 201 -- -- 200 201
Los Angeles, Sonnenblick del Rio Senior Lien
(AMBAC)
6.000%, 11/01/2019 -- -- 330 350 330 350
Los Angeles, Sonnenblick Del Rio, West Los
Angeles (AMBAC)
5.375%, 11/01/2010 305 314 -- -- 305 314
Poway California (AMBAC)
4.500%, 08/01/2016 585 594 -- -- 585 594
Ramona Unified School District, Convertible
CABs (FGIC)
0.000% through 05/01/2012, thereafter
5.000%, 05/01/2032 (c) -- -- 500 405 500 405
Ridgecrest Civic Center Project, Pre-refunded
03/01/2009 @ 101
6.250%, 03/01/2021 (b) -- -- 250 260 250 260
B-16
First American California Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
California Intermediate Tax California Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Roseville Water Utility (MBIA)
4.750%, 12/01/2023 -- -- 750 752 750 752
Travis Unified School District (FGIC)
4.500%, 09/01/2016 300 301 -- -- 300 301
---------- ------- ---------- ------- ---------- --------
TOTAL CERTIFICATES OF PARTICIPATION 2,015 2,052 2,130 2,085 4,145 4,137
---------- ------- ---------- ------- ---------- --------
TOTAL MUNICIPAL BONDS
(COST $53,161 AND $43,721, RESPECTIVELY) 53,905 53,220 43,990 43,470 97,895 96,690
---------- ------- ---------- ------- ---------- --------
SHORT-TERM INVESTMENT - 4.6%
Blackrock Liquidity Funds
(COST $3,525 AND $1,157, RESPECTIVELY) 3,524,936 3,525 1,156,683 1,157 4,681,619 4,682
------- ------- --------
TOTAL INVESTMENTS - 99.0%
(COST $56,686 AND $44,878, RESPECTIVELY) 56,745 44,627 101,372
------- ------- --------
OTHER ASSETS AND LIABILITIES, NET - 1.0% 642 414 1,056
------- ------- --------
TOTAL NET ASSETS - 100.0% $57,387 $45,041 $102,428
======= ======= ========
(a) Escrowed to Maturity issues are typically backed by U.S. government
obligations. If callable, these bonds may still be subject to call prior to
maturity.
(b) Pre-refunded issues are typically backed by U.S. government obligations,
which ensure the timely payment of principal and interest. These bonds
mature at the call date and price indicated.
(c) Convertible Capital Appreciation Bonds (Convertible CABs) - These bonds
initially pay no interest but accrete in value from the date of issuance
through the conversion date, at which time the bonds start to accrue and
pay interest on a semiannual basis until final maturity.
(d) Zero coupon bonds make no periodic interest payments, but are issued at
deep discounts from par value. The rate shown is the effective yield as of
June 30, 2008.
AGTY - Assured Guaranty
AMBAC - American Municipal Bond Assurance Corporation
AMT - Alternative Minimum Tax. As of June 30, 2008, the aggregate market value
of securities subject to the AMT was $3,051, which represents 3.0% of total net
assets.
CMI - California Mortgage Insurance Program
FGIC - Financial Guaranty Insurance Corporation
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
MBIA - Municipal Bond Insurance Association
RAAI - Radian Asset Assurance Inc.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-17
FIRST AMERICAN CALIFORNIA TAX FREE FUND
FIRST AMERICAN CALIFORNIA INTERMEDIATE TAX FREE FUND
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 2008 (000'S OMITTED)
1. Basis of Combination
The accompanying Unaudited Pro Forma Combined Financial Statements,
including the Statements of Assets and Liabilities, Statements of
Operations, and Schedule of Investments (collectively, "Unaudited Pro Forma
Financial Statements") reflect the accounts of California Tax Free Fund
(the "acquiring fund") and California Intermediate Tax Free Fund (the
"acquired fund"), each a series of First American Investment Funds, Inc.
The Statements of Assets and Liabilities and Schedule of Investments
reflect fund information as if the proposed reorganization occurred as of
June 30, 2008. The Statement of Operations reflects fund information as if
the proposed reorganization was in effect for the twelve month period ended
June 30, 2008. The Unaudited Pro Forma Financial Statements have been
derived from books and records utilized in calculating daily net asset
values of California Tax Free Fund and California Intermediate Tax Free
Fund at June 30, 2008.
The Plan of Reorganization provides that at the time the reorganization
becomes effective (the "Effective Time of the Reorganization")
substantially all of the assets and liabilities of the acquired fund will
become assets and liabilities of the acquiring fund. In exchange for the
transfer of assets and liabilities, the acquiring fund will issue to the
acquired fund full and fractional shares of the designated share classes of
the acquiring fund, and the acquired fund will make a liquidating
distribution of such shares to its shareholders. The number of shares of
the acquiring fund so issued will be in equal value to the full and
fractional shares of the acquired fund that are outstanding immediately
prior to the Effective Time of the Reorganization. At and after the
Effective Time of the Reorganization, all debts, liabilities and
obligations of the acquired fund will attach to the acquiring fund and may
thereafter be enforced against the acquiring fund to the same extent as if
the acquiring fund had incurred them. The Unaudited Pro Forma Financial
Statements give effect to the proposed transfer described above.
The Unaudited Pro Forma Financial Statements reflect the combined results
of operations of the acquired and acquiring funds. However, should such
reorganization be effected, the Statements of Operations of the acquiring
fund will not be restated for pre-combination period results of the
acquired fund. The Unaudited Pro Forma Financial Statements should be read
in conjunction with the historical financial statements of each Fund
incorporated by reference in the Statement of Additional Information.
2. Service Providers
FAF Advisors, Inc. (the "Advisor"), a subsidiary of U.S. Bank National
Association ("U.S. Bank"), will serve as the combined fund's investment
advisor and administrator. U.S. Bancorp Fund Services, LLC ("USBFS") will
serve as sub-administrator and transfer agent to the fund. U.S. Bank will
serve as the custodian to the fund.
3. Share Classes and Fees
The acquiring fund has Class A, Class C, and Class Y shares, which have
identical voting, dividend, liquidation, and other rights, and the same
terms and conditions, except that certain fees and expenses, including
distribution and shareholder servicing fees, may differ among classes. Each
class has
B-18
exclusive voting rights on any matters relating to that class' servicing or
distribution arrangements. Class A shares of California Intermediate Tax
Free Fund are sold with a maximum front-end sales charge of 2.25% and
Class A shares of California Tax Free Fund are sold with a maximum
front-end sales charge of 4.25%. Class C shares, offered only by California
Tax Free Fund, may be subject to a contingent deferred sales charge of
1.00% for 12 months. Class Y shares of both Funds have no sales charge and
are offered only to qualifying institutional investors and certain other
qualifying accounts. More information on the classes of shares offered can
be found in the Proxy Statement/Prospectus.
The investment advisory fees and distribution fees (less any fee waivers or
expense reimbursements in effect during the period) have been charged to
the combined Fund based on the fee schedule in effect for California Tax
Free Fund at the combined level of average net assets for the periods
ended June 30, 2008. The Advisor has contractually agreed to waive fees and
reimburse expenses during the current fiscal year so that total fund
operating expenses do not exceed 0.65%, 1.15% and 0.50%, respectively, for
Class A, Class C and Class Y shares. The Advisor has also contractually
agreed, in addition to other fee waivers and expense reimbursements, to
reimburse an amount of Class A share 12b-1 fees equal to 0.10% of average
daily net assets for California Tax Free Fund through October 31, 2009.
These fee waivers may be terminated at any time after October 31, 2009, at
the discretion of the Advisor.
4. Unaudited Pro Forma Adjustments and Unaudited Pro Forma Combined Columns
The Unaudited Pro Forma Combined Statements of Operations assume similar
rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of
each Fund's gross investment income. Unaudited Pro Forma operating expenses
include the actual expenses of the Funds adjusted to reflect the expected
expenses of the combined entity.
5. Portfolio Valuation, Securities Transactions and Related Income
Securities are valued at market value. Short-term investments maturing in
60 days or less are valued at amortized cost, which approximates market
value. For financial reporting purposes, security transactions are
accounted for on a trade date basis. Net realized gains or losses from
sales of securities are determined by comparing the net sale proceeds to an
identified cost basis. Interest income, including amortization of bond
premium and discount, and expenses are recorded on an accrual basis.
6. Capital Shares
The Unaudited Pro Forma net asset values per share assume the issuance of
Class A and Y shares of the California Tax Free Fund which would have been
issued at June 30, 2008 in connection with the proposed Reorganization.
Shareholders of the California Intermediate Tax Free Fund would receive
Class A and Class Y shares of the California Tax Free Fund based on
conversion ratios determined on June 30, 2008. The conversion ratios are
calculated by dividing the net asset value of the California Intermediate
Tax Free Fund by the net asset value per share of the respective class of
the California Tax Free Fund.
7. Merger Costs
All costs associated with the Reorganization will be paid by the Advisor.
B-19
First American Colorado Tax Free Fund
Unaudited Pro Forma Statements of ASSETS AND LIABILITIES
June 30, 2008, all dollars and shares are rounded to thousands (000), except per
share data
Colorado
Intermediate Tax Colorado Tax Unaudited Unaudited
Free Fund, Free Fund, Pro Forma Pro Forma
Acquired Fund Acquiring Fund Adjustments Combined
---------------- -------------- ----------- ---------
Unaffiliated investments, at cost $49,011 $23,232 $ -- $72,243
Affiliated money market fund, at cost 916 1,844 -- 2,760
ASSETS:
Unaffiliated investments, at value $49,530 $23,091 $ -- $72,621
Affiliated money market fund, at value 916 1,844 -- 2,760
Receivable for dividends and interest 345 175 -- 520
Receivable for capital shares sold 1 4 -- 5
Receivable from advisor -- 14 -- 14
Prepaid expenses and other assets 2 2 -- 4
------- ------- ---- -------
Total assets 50,794 25,130 -- 75,924
======= ======= ==== =======
LIABILITIES:
Bank overdraft 1 -- -- 1
Dividends payable 150 62 -- 212
Payable for investments purchased 259 259 -- 518
Payable for capital shares redeemed 201 200 -- 401
Payable to affiliates 24 17 -- 41
Payable for distribution and
shareholder servicing fees 1 3 -- 4
Accrued expenses and other liabilities 26 26 -- 52
------- ------- ---- -------
Total liabilities 662 567 -- 1,229
------- ------- ---- -------
Net assets 50,132 24,563 -- 74,695
======= ======= ==== =======
COMPOSITION OF NET ASSETS:
Portfolio capital 49,492 24,548 -- 74,040
Undistributed net investment income 5 15 -- 20
Accumulated net realized gain on
investments 116 141 -- 257
Net unrealized appreciation
(depreciation) of investments 519 (141) -- 378
------- ------- ---- -------
Net assets $50,132 $24,563 $ -- $74,695
======= ======= ==== =======
Class A:
Net assets $ 6,199 $ 5,815 $ -- $12,014
Shares issued and outstanding (1) 609 566 (6) 1,169
Net asset value and redemption price
per share $ 10.19 $ 10.28 $ -- $ 10.28
Maximum offering price per share (2) $ 10.42 $ 10.74 $ -- $ 10.74
Class C:
Net assets $ N/A $ 2,859 $ -- $ 2,859
Shares issued and outstanding (1) N/A 279 -- 279
Net asset value, offering price, and
redemption price per share (3) $ N/A $ 10.26 $ -- $ 10.26
Class Y:
Net assets $43,933 $15,889 $ -- $59,822
B-20
First American Colorado Tax Free Fund
Unaudited Pro Forma Statements of ASSETS AND LIABILITIES
June 30, 2008, all dollars and shares are rounded to thousands (000), except per
share data
Colorado
Intermediate Tax Colorado Tax Unaudited Unaudited
Free Fund, Free Fund, Pro Forma Pro Forma
Acquired Fund Acquiring Fund Adjustments Combined
---------------- -------------- ----------- ---------
Shares issued and outstanding (1) 4,324 1,543 (55) 5,812
Net asset value, offering price, and
redemption price per share $10.16 $10.29 $ -- $10.29
1 $0.0001 par value - 2 billion authorized for each class
2 The offering price is calculated by dividing the net asset value by 1 minus
the maximum sales charge
3 Class C has a contingent deferred sales charge.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-21
First American Colorado Tax Free Fund
Unaudited Pro Forma Statement of OPERATIONS
For the Year Ended June 30, 2008, all dollars are rounded to thousands (000)
Colorado
Intermediate Tax Colorado Tax Unaudited Unaudited
Free Fund, Free Fund, Pro Forma Pro Forma
Acquired Fund Acquiring Fund Adjustments Combined
---------------- -------------- ----------- ---------
INVESTMENT INCOME:
Interest from unaffiliated investments $2,200 $1,163 $ -- $ 3,363
Dividends from affiliated money market
fund 21 17 -- 38
------ ------ ----- -------
Total investment income 2,221 1,180 -- 3,401
EXPENSES:
Investment advisory fees 234 115 -- 349
Administration fees 110 57 (6)A 161
Transfer agent fees 60 83 (59)B 84
Custodian fees 3 2 -- 5
Legal fees 13 13 (11)C 15
Audit fees 33 33 (33)D 33
Registration fees 5 6 (5)E 6
Postage and printing fees 3 2 -- 5
Directors' fees 26 27 (23)F 30
Other expenses 16 16 (16)G 16
Distribution and shareholder servicing
fees -- Class A 15 17 -- 32
Distribution and shareholder servicing
fees -- Class C -- 18 -- 18
------ ------ ----- -------
Total expenses 518 389 (153) 754
Less: Fee waivers (182) (240) 66H (356)
Less: Indirect payments from custodian -- -- -- --
------ ------ ----- -------
Total net expenses 336 149 (87) 398
------ ------ ----- -------
Investment income - net $1,885 $1,031 $ 87 $ 3,003
REALIZED AND UNREALIZED
GAINS (LOSSES) ON INVESTMENTS-NET:
Net realized gain (loss) on
investments $ 116 $ 144 $ -- $ 260
Net change in unrealized appreciation
or depreciation of investments (552) (802) -- (1,354)
------ ------ ----- -------
Net gain (loss) on investments (436) (658) -- (1,094)
------ ------ ----- -------
Net increase in net assets resulting
from operations $1,449 $ 373 $ 87 $ 1,909
====== ====== ===== =======
A To reflect a reduction in administration fees due to the merger.
B To reflect a reduction in transfer agent fees due to the merger.
C To reflect a reduction in legal fees due to the merger.
D To reflect a reduction in audit fees due to the merger.
E To reflect a reduction in registration fees due to the merger.
B-22
F To reflect a reduction in Directors' compensation due to the merger.
G To reflect a reduction in other expenses due to the merger.
H To adjust the expense reimbursement to reflect the net reduction in fees
resulting from the merger per the agreement by FAF Advisors, Inc. and its
affiliates to waive fees and reimburse other fund expenses following the
merger.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-23
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
------------------------- ----------------------- ----------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
MUNICIPAL BONDS - 97.2%
REVENUE BONDS - 76.4%
CONTINUING CARE RETIREMENT COMMUNITIES - 2.2%
Colorado State Health Facilities Authority,
Christian Living Communities Project,
Series A
5.250%, 01/01/2014 $ 250 $ 241 $ -- $ -- $ 250 $ 241
5.750%, 01/01/2026 -- -- 100 91 100 91
Colorado State Health Facilities Authority,
Covenant Retirement Communities
5.000%, 12/01/2016 500 494 -- -- 500 494
5.250%, 12/01/2025 -- -- 200 185 200 185
Colorado State Health Facilities Authority,
Covenant Retirement Communities, Series B
6.125%, 12/01/2033 -- -- 350 347 350 347
Illinois Finance Authority, Franciscan
Communities, Series A
5.500%, 05/15/2037 -- -- 225 189 225 189
Illinois Finance Authority, Three Crowns Park
Plaza, Series A
5.875%, 02/15/2026 -- -- 100 91 100 91
---------- ------- ---------- ------- ---------- --------
750 735 975 903 1,725 1,638
---------- ------- ---------- ------- ---------- --------
EDUCATION - 12.1%
Anderson, Indiana, Economic Development
Revenue, Anderson University Project
5.000%, 10/01/2032 -- -- 350 299 350 299
Colorado Educational & Cultural Facilities
Authority, Academy Charter School Project,
Series A (SMO)
4.625%, 12/15/2028 -- -- 330 309 330 309
Colorado Educational & Cultural Facilities
Authority, Ave Maria School Project (RAAI)
4.750%, 12/01/2014 220 221 -- -- 220 221
4.750%, 12/01/2015 230 229 -- -- 230 229
4.850%, 12/01/2025 -- -- 250 236 250 236
Colorado Educational & Cultural Facilities
Authority, Ave Maria School Project,
Pre-refunded 12/01/2010 @ 100 (RAAI)
6.000%, 12/01/2016 (a) -- -- 200 215 200 215
Colorado Educational & Cultural Facilities
Authority, Charter School, James Irwin
Foundation (CIFG) (STAID)
5.000%, 08/01/2027 -- -- 250 245 250 245
Colorado Educational & Cultural Facilities
Authority, Cheyenne Mountain Charter
School, Series A (SMO)
5.000%, 06/15/2018 240 244 -- -- 240 244
5.000%, 06/15/2019 255 258 -- -- 255 258
5.000%, 06/15/2020 265 266 -- -- 265 266
5.250%, 06/15/2029 -- -- 500 500 500 500
Colorado Educational & Cultural Facilities
Authority, Northwest Nazarene
4.500%, 11/01/2015 450 435 240 232 690 667
B-24
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
------------------------- ----------------------- ----------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Colorado Educational & Cultural Facilities
Authority, Northwest Nazarene,
Pre-refunded 11/01/2010 @ 102
4.500%, 11/01/2015 (a) 100 105 60 63 160 168
Colorado State Board of Governors University
Enterprise System Revenue, Series B (FGIC)
4.250%, 03/01/2017 500 495 -- -- 500 495
Colorado State Educational & Cultural
Facilities Authority, Bromley East Charter
School Project, Escrowed to Maturity
6.250%, 09/15/2011 (b) 230 241 -- -- 230 241
Colorado State Educational & Cultural
Facilities Authority, Classical Academy
Charter School Project, Escrowed to
Maturity
6.375%, 12/01/2011 (b) 495 524 350 371 845 895
Colorado State Educational & Cultural
Facilities Authority, Core Knowledge
Charter School, Pre-refunded 11/01/2009
@ 100
6.850%, 11/01/2016 (a) 440 466 -- -- 440 466
Colorado State Educational & Cultural
Facilities Authority, Front Range
Christian School Project (LOC: Evangelical
Christian, Wescorp Credit Union)
4.500%, 04/01/2018 225 224 -- -- 225 224
4.500%, 04/01/2019 240 237 -- -- 240 237
5.000%, 04/01/2037 -- -- 750 712 750 712
Fort Lewis College Board, Trustees Enterprise
Revenue, Series A (FGIC)
4.375%, 10/01/2020 -- -- 100 96 100 96
Fort Lewis College Board, Trustees Enterprise
Revenue, Series B-1 (FGIC)
4.250%, 10/01/2019 625 603 -- -- 625 603
4.375%, 10/01/2020 725 699 -- -- 725 699
University of Colorado Enterprise System
Revenue, University of Colorado Regents
(MBIA)
5.000%, 06/01/2032 -- -- 500 504 500 504
---------- ------- ---------- ------- ---------- --------
5,240 5,247 3,880 3,782 9,120 9,029
---------- ------- ---------- ------- ---------- --------
HEALTHCARE - 23.2%
Aspen Valley Hospital
4.375%, 10/15/2014 560 549 -- -- 560 549
Boulder County Longmont United Hospital
Project (RAAI)
5.300%, 12/01/2010 -- -- 330 340 330 340
Colorado Health Facilities Revenue, Valley
View Hospital Association
5.500%, 05/15/2028 -- -- 400 391 400 391
Colorado Health Facilities, Class B
5.250%, 03/01/2036 -- -- 1,000 1,010 1,000 1,010
Colorado Health Facilities, Parkview Medical
Center Project, Series B
5.000%, 09/01/2029 -- -- 355 334 355 334
Colorado Springs Hospital Revenue, Series B
(AMBAC)
6.500%, 12/15/2024 (c) 700 700 350 350 1,050 1,050
Colorado State Health Facilities Authority,
Adventist Health, Sunbelt, Series E
5.000%, 11/15/2012 500 517 -- -- 500 517
Colorado State Health Facilities Authority,
Boulder Hospital (MBIA)
5.000%, 10/01/2010 500 520 -- -- 500 520
B-25
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
------------------------- ----------------------- ----------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
Colorado State Health Facilities Authority,
Evangelical Lutheran, Series A
5.250%, 06/01/2034 -- -- 230 215 230 215
Colorado State Health Facilities Authority,
Evangelical Lutheran, Unrefunded
6.900%, 12/01/2025 135 143 60 63 195 206
Colorado State Health Facilities Authority,
Evangelical Lutheran, Pre-refunded
12/01/2010 @ 102
6.900%, 12/01/2025 (a) 215 239 90 100 305 339
Colorado State Health Facilities Authority,
Evangelical Lutheran Project
5.000%, 06/01/2016 250 253 100 101 350 354
Colorado State Health Facilities Authority,
Health & Residential Care Facilities,
Volunteers of America, Series A
5.000%, 07/01/2015 500 478 -- -- 500 478
5.250%, 07/01/2027 -- -- 300 260 300 260
Colorado State Health Facilities Authority,
Longmont United Hospital, Series B (RAAI)
5.250%, 12/01/2013 860 885 -- -- 860 885
4.625%, 12/01/2024 -- -- 325 298 325 298
Colorado State Health Facilities Authority,
National Jewish Medical & Research Center
Project
5.375%, 01/01/2016 700 701 300 301 1,000 1,002
Colorado State Health Facilities Authority,
Parkview Medical Center
5.750%, 09/01/2008 250 251 -- -- 250 251
Colorado State Health Facilities Authority,
Parkview Medical Center, Escrowed to
Maturity
5.500%, 09/01/2009 (b) 500 519 -- -- 500 519
5.600%, 09/01/2011 (b) -- -- 300 322 300 322
Colorado State Health Facilities Authority,
Parkview Medical Center Project, Series B
5.000%, 09/01/2018 500 499 -- -- 500 499
Colorado State Health Facilities Authority,
Portercare Adventist Project, Pre-refunded
11/15/2011 @ 101
6.500%, 11/15/2023 (a) -- -- 600 668 600 668
Colorado State Health Facilities Authority,
Poudre Valley Health Care, Series F
5.000%, 03/01/2025 -- -- 350 329 350 329
Colorado State Health Facilities Authority,
The Devereux Foundation (RAAI)
4.200%, 11/01/2013 80 78 -- -- 80 78
Colorado State Health Facilities Authority,
Vail Valley Medical Center Project
5.000%, 01/15/2013 300 306 -- -- 300 306
5.000%, 01/15/2020 -- -- 250 244 250 244
5.750%, 01/15/2022 800 810 -- -- 800 810
5.800%, 01/15/2027 -- -- 500 505 500 505
Colorado State Health Facilities Authority,
Valley View Hospital Association Project,
Series A (RAAI)
5.000%, 05/15/2012 165 168 -- -- 165 168
B-26
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
5.000%, 05/15/2013 500 508 -- -- 500 508
Colorado State Health Facilities Authority,
Yampa Valley Medical Center Project
5.000%, 09/15/2013 410 411 -- -- 410 411
Delta County Memorial Hospital District
5.350%, 09/01/2017 500 500 220 220 720 720
Denver Health & Hospital Authority,
Healthcare Revenue, Series A
4.750%, 12/01/2027 -- -- 250 219 250 219
Halifax Medical Center, Hospital Revenue,
Series A
5.000%, 06/01/2038 -- -- 325 281 325 281
Iowa Finance Authority, Health Facilities
Revenue, Care Initiatives Project,
Series A
5.000%, 07/01/2020 -- -- 100 88 100 88
La Junta County Hospital, Arkansas Valley
Regional Medical Center Project
5.500%, 04/01/2009 355 360 -- -- 355 360
6.100%, 04/01/2024 -- -- 100 101 100 101
Montrose Memorial Hospital
5.300%, 12/01/2013 260 264 -- -- 260 264
5.450%, 12/01/2014 390 398 -- -- 390 398
6.375%, 12/01/2023 -- -- 130 135 130 135
New Hampshire Health & Educational Facilities
Authority, The Memorial Hospital
5.250%, 06/01/2036 -- -- 100 88 100 88
University of Colorado Hospital Authority,
Pre-refunded 11/15/2011 @ 100
5.000%, 11/15/2014 (a) 300 316 -- -- 300 316
---------- ------- ---------- ------- ---------- --------
10,230 10,373 7,065 6,963 17,295 17,336
---------- ------- ---------- ------- ---------- --------
HOUSING - 2.9%
Colorado State Housing & Finance Authority,
Multifamily Project, Class I, Series B-4
5.900%, 04/01/2031 -- -- 100 102 100 102
Colorado State Housing & Finance Authority,
Series E-2 (AMT)
7.000%, 02/01/2030 -- -- 40 42 40 42
Colorado State Housing & Finance Authority,
Single Family Housing Program, Series
B-2 (AMT)
7.100%, 04/01/2017 -- -- 20 21 20 21
Denver City & County Housing Authority,
Capital Funding Program, Three Towers
Rehabilitation Project (AMT) (FSA)
4.000%, 05/01/2012 270 268 -- -- 270 268
4.000%, 11/01/2012 270 268 -- -- 270 268
4.550%, 11/01/2017 1,000 977 -- -- 1,000 977
5.200%, 11/01/2027 250 245 250 245 500 490
---------- ------- ---------- ------- ---------- --------
1,790 1,758 410 410 2,200 2,168
---------- ------- ---------- ------- ---------- --------
LEASE REVENUE - 0.7%
Puerto Rico Public Buildings Authority,
Government Facilities, Series M-2,
Mandatory Put 07/01/2017 @ 100 (AMBAC)
(COMGTY)
5.500%, 07/01/2035 500 511 -- -- 500 511
---------- ------- ---------- ------- ---------- --------
B-27
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
MISCELLANEOUS - 5.1%
Colorado Educational & Cultural Facilities
Authority, Colorado Public Radio
4.800%, 07/01/2009 250 253 -- -- 250 253
4.900%, 07/01/2010 265 270 -- -- 265 270
Colorado Educational & Cultural Facilities
Authority, National Conference of State
Legislatures
5.250%, 06/01/2013 700 725 -- -- 700 725
5.250%, 06/01/2021 -- -- 750 757 750 757
Denver City & County, Helen G. Bonfils
Foundation Project, Series B
5.125%, 12/01/2017 900 901 100 100 1,000 1,001
High Plains Metropolitan District, Series B
(LOC: Compass Bank)
4.375%, 12/01/2015 785 794 -- -- 785 794
---------- ------- ---------- ------- ---------- --------
2,900 2,943 850 857 3,750 3,800
---------- ------- ---------- ------- ---------- --------
RECREATIONAL FACILITY AUTHORITY - 0.6%
Hyland Hills Metropolitan Park & Recreation
District, Series A
6.100%, 12/15/2009 210 212 -- -- 210 212
Hyland Hills Metropolitan Park & Recreation
District, Special Revenue (ACA)
5.000%, 12/15/2015 300 293 -- -- 300 293
---------- ------- ---------- ------- ---------- --------
510 505 -- -- 510 505
---------- ------- ---------- ------- ---------- --------
REVOLVING FUND - 0.1%
Colorado Water Resource & Power Development
Authority, Small Water Resources, Series A
(FGIC)
5.700%, 11/01/2015 55 56 -- -- 55 56
---------- ------- ---------- ------- ---------- --------
TAX REVENUE - 3.7%
Douglas County Sales & Use Tax Revenue (FSA)
5.625%, 10/15/2020 -- -- 200 210 200 210
Highlands Ranch Metropolitan School District
#2 (FSA)
5.000%, 06/15/2016 -- -- 20 20 20 20
Larimer County Sales & Use Tax (AMBAC)
5.000%, 12/15/2010 300 315 -- -- 300 315
Larimer County Sales & Use Tax, Pre-refunded
12/15/2010 @ 100 (AMBAC)
5.625%, 12/15/2018 (a) -- -- 100 107 100 107
Longmont Sales & Use Tax, Pre-refunded
11/15/2010 @ 100
5.500%, 11/15/2015 (a) 500 531 -- -- 500 531
Park Meadows Business Improvement District,
Shared Sales Tax
5.000%, 12/01/2017 250 243 -- -- 250 243
5.300%, 12/01/2027 -- -- 475 445 475 445
Superior Open Space Sales & Use Tax
4.500%, 06/01/2013 100 99 -- -- 100 99
4.600%, 06/01/2014 225 223 -- -- 225 223
5.000%, 06/01/2026 -- -- 330 312 330 312
Westminster Special Purpose Sales & Use Tax,
Post Project, Series D (FSA)
4.250%, 12/01/2018 250 253 -- -- 250 253
---------- ------- ---------- ------- ---------- --------
1,625 1,664 1,125 1,094 2,750 2,758
---------- ------- ---------- ------- ---------- --------
TRANSPORTATION - 13.4%
Colorado Department of Transportation (AMBAC)
6.000%, 06/15/2010 1,000 1,060 -- -- 1,000 1,060
B-28
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
colorado Intermediate Tax colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
E-470 Public Highway Authority, Series B,
Zero Coupon Bond (MBIA)
5.147%, 09/01/2017 (d) 1,575 988 -- -- 1,575 988
5.337%, 09/01/2019 (d) 960 533 -- -- 960 533
5.640%, 09/01/2022 (d) 1,000 455 -- -- 1,000 455
E-470 Public Highway Authority, Series C,
Convertible CABs (MBIA) 0.000% through
09/01/2011, thereafter 5.000%, 09/01/2017
(e) 500 427 -- -- 500 427
E-470 Public Highway Authority, Series D1
(MBIA)
5.500%, 09/01/2024 -- -- 300 305 300 305
Eagle County Air Terminal Revenue, Airport
Terminal Improvement Project, Series B
(AMT)
5.250%, 05/01/2020 130 116 75 67 205 183
Northwest Parkway Public Highway Authority,
Convertible CABs, Escrowed to Maturity
(FSA) 0.000% through 06/15/2011,
thereafter 5.200%, 06/15/2014 (b) (e) 750 695 750 695 1,500 1,390
Northwest Parkway Public Highway Authority,
Convertible CABs, Escrowed to Maturity
(AMBAC) 0.000% through 06/15/2011,
thereafter 5.250%, 06/15/2015 (b) (e) 2,000 1,863 500 466 2,500 2,329
Northwest Parkway Public Highway Authority,
Convertible CABs, Escrowed to Maturity
(FSA) 0.000% through 06/15/2011,
thereafter 5.350%, 06/15/2016 (b) (e) 1,000 936 -- -- 1,000 936
Northwest Parkway Public Highway Authority,
Convertible CABs, Pre-refunded 06/15/2016
@ 100 (AMBAC) 0.000% through 06/15/2011,
thereafter 5.700%, 06/15/2021 (a) (d) -- -- 1,000 950 1,000 950
Walker Field Public Airport Authority Revenue
4.500%, 12/01/2016 275 260 -- -- 275 260
4.750%, 12/01/2027 -- -- 250 216 250 216
---------- ------- ---------- ------- ---------- --------
9,190 7,333 2,875 2,699 12,065 10,032
---------- ------- ---------- ------- ---------- --------
UTILITIES - 12.4%
Arapahoe County Water & Wastewater Authority,
Escrowed to Maturity
5.750%, 12/01/2008 (b) 160 163 -- -- 160 163
Arapahoe County Water & Wastewater Authority,
Pre-refunded 12/01/2009 @ 100
6.000%, 12/01/2011 (a) 185 194 -- -- 185 194
Arkansas River Power Authority
6.000%, 10/01/2040 -- -- 225 221 225 221
Aurora Water System Revenue, First Lien,
Series A
4.750%, 08/01/2026 1,500 1,511 -- -- 1,500 1,511
4.750%, 08/01/2027 225 226 -- -- 225 226
Boulder Water & Sewer, Escrowed to Maturity
5.750%, 12/01/2010 (b) 1,545 1,651 -- -- 1,545 1,651
Boulder Water & Sewer, Pre-refunded
12/01/2010 @ 100
5.700%, 12/01/2019 (a) -- -- 300 320 300 320
Broomfield Water Activity Enterprise (MBIA)
5.500%, 12/01/2017 500 527 -- -- 500 527
B-29
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
5.500%, 12/01/2019 -- -- 400 420 400 420
Colorado Housing & Finance Authority, Waste
Disposal Management Income Project (AMT)
5.700%, 07/01/2018 -- -- 250 244 250 244
Colorado Water Resource & Power Development
Authority, Small Water Resources,
Series A, Pre-refunded 11/01/2010
@ 100 (FGIC)
5.700%, 11/01/2015 (a) 45 48 -- -- 45 48
Denver City & County Wastewater (FGIC)
5.250%, 11/01/2017 1,260 1,316 -- -- 1,260 1,316
Fort Collins Wastewater Utility Enterprise
(FSA)
5.500%, 12/01/2020 -- -- 300 314 300 314
Inverness Water & Sanitation District,
Arapahoe & Douglas Counties, Series A
(RAAI)
4.250%, 12/01/2016 600 569 -- -- 600 569
Public Authority for Colorado Energy
Natural Gas Revenue
6.250%, 11/15/2028 350 337 150 144 500 481
Puerto Rico Commonwealth, Aqueduct & Sewer
Authority, Series A (AGTY)
5.000%, 07/01/2016 500 528 -- -- 500 528
Puerto Rico Electric Power Authority, Series
WW
5.250%, 07/01/2025 -- -- 500 504 500 504
---------- ------- ---------- ------- ---------- --------
6,870 7,070 2,125 2,167 8,995 9,237
---------- ------- ---------- ------- ---------- --------
TOTAL REVENUE BONDS 39,660 38,195 19,305 18,875 58,965 57,070
---------- ------- ---------- ------- ---------- --------
GENERAL OBLIGATIONS - 16.3%
Antelope Water System
4.875%, 12/01/2025 -- -- 175 167 175 167
Arapahoe County School District #5, Cherry
Creek, Pre-refunded 12/15/2009 @ 100 (STAID)
5.500%, 12/15/2011 (a) 1,000 1,046 -- -- 1,000 1,046
Bromley Park Metropolitan District #2,
Series A (RAAI)
5.000%, 12/01/2027 -- -- 500 477 500 477
Cordillera Metropolitan School District,
Eagle County (RAAI)
5.000%, 12/01/2013 620 630 -- -- 620 630
Denver City & County, Medical Facilities
4.000%, 08/01/2016 500 505 -- -- 500 505
Denver West Metropolitan School District
4.125%, 12/01/2014 150 141 -- -- 150 141
4.200%, 12/01/2015 480 449 -- -- 480 449
Douglas County School District #RE-1,
Douglas & Elbert Counties, Series B, Zero
Coupon Bond (FSA) (STAID)
3.947%, 12/15/2015 (d) 335 250 -- -- 335 250
Fiddlers Business Improvement District,
Greenwood Village, Series 1 (ACA)
4.250%, 12/01/2015 460 434 -- -- 460 434
4.500%, 12/01/2027 -- -- 375 307 375 307
Garfield County School District #RE-2 (FSA)
(STAID)
5.250%, 12/01/2019 1,530 1,608 -- -- 1,530 1,608
Jefferson County School District #R-001
(MBIA) (STAID)
6.250%, 12/15/2009 1,000 1,055 -- -- 1,000 1,055
McCook, Illinois
B-30
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
5.000%, 12/01/2026 -- -- 350 342 350 342
Midcities Metropolitan School District #2
(RAAI)
5.125%, 12/01/2030 -- -- 200 193 200 193
North Range Metropolitan District #1 (ACA)
4.250%, 12/15/2018 560 480 -- -- 560 480
4.500%, 12/15/2031 -- -- 300 219 300 219
Pueblo County School District #070, Pueblo
Rural (FGIC) (STAID)
5.000%, 12/01/2019 910 955 -- -- 910 955
Puerto Rico Commonwealth, Public Improvement,
Series A
5.250%, 07/01/2026 -- -- 500 490 500 490
Puerto Rico Commonwealth, Series C-7 (MBIA)
6.000%, 07/01/2027 250 261 250 261 500 522
SBC Metropolitan School District (ACA)
4.250%, 12/01/2015 445 433 -- -- 445 433
Sterling Hills West Metropolitan District
(FSA)
4.750%, 12/01/2018 250 262 -- -- 250 262
Westglenn Metropolitan District
6.000%, 12/01/2014 1,220 1,242 -- -- 1,220 1,242
---------- ------- ---------- ------- ---------- --------
TOTAL GENERAL OBLIGATIONS 9,710 9,751 2,650 2,456 12,360 12,207
---------- ------- ---------- ------- ---------- --------
CERTIFICATES OF PARTICIPATION - 4.5%
Broomfield County Open Space Park &
Recreation Facilities (AMBAC)
5.500%, 12/01/2020 -- -- 800 831 800 831
Broomfield County, Westminster Open Space
Foundation
4.625%, 12/01/2025 -- -- 330 317 330 317
Canon City Finance Authority (AGTY)
4.250%, 12/01/2023 200 189 -- -- 200 189
Colorado Springs Old City Hall Project (FSA)
5.500%, 12/01/2017 -- -- 200 210 200 210
5.500%, 12/01/2020 -- -- 200 209 200 209
Garfield County Building Corporation (AMBAC)
5.300%, 12/01/2011 400 415 -- -- 400 415
Pueblo County, Capital Construction
4.400%, 12/01/2016 410 405 -- -- 410 405
5.000%, 12/01/2024 -- -- 200 193 200 193
Rangeview Library District (AGTY)
4.250%, 12/15/2021 595 575 -- -- 595 575
---------- ------- ---------- ------- ---------- --------
TOTAL CERTIFICATES OF PARTICIPATION 1,605 1,584 1,730 1,760 3,335 3,344
---------- ------- ---------- ------- ---------- --------
TOTAL MUNICIPAL BONDS
(COST $49,011 AND $23,232, RESPECTIVELY) 50,975 49,530 23,685 23,091 74,660 72,621
---------- ------- ---------- ------- ---------- --------
SHORT-TERM INVESTMENT - 3.7%
First American Tax Free Obligations Fund,
Class Z (f)
(COST $916 AND $1,844, RESPECTIVELY) 916,442 916 1,844,482 1,844 2,760,924 2,760
---------- ------- ---------- ------- ---------- --------
TOTAL INVESTMENTS - 100.9%
(COST $49,927 AND $25,076, RESPECTIVELY) 50,446 24,935 75,381
------- ------- --------
B-31
First American Colorado Tax Free Fund
Unaudited Pro Forma Schedule of
INVESTMENTS
June 30, 2008, all dollars are rounded to thousands (000)
Colorado Intermediate Tax Colorado Tax Free Fund, Unaudited
Free Fund, Acquired Fund Acquiring Fund Pro Forma Combined
--------------------------- ------------------------- ---------------------
PAR/ PAR/ PAR/
DESCRIPTION SHARES VALUE SHARES VALUE SHARES VALUE
----------- ---------- ------- ---------- ------- ---------- --------
OTHER ASSETS AND LIABILITIES, NET - (0.9)% (314) (372) (686)
------- ------- --------
TOTAL NET ASSETS - 100.0% $50,132 $24,563 $ 74,695
------- ------- --------
(a) Pre-refunded issues are typically backed by U.S. government obligations,
which secure the timely payment of principal and interest. These bonds
mature at the call date and price indicated.
(b) Escrowed to Maturity issues are typically backed by U.S. government
obligations, which secure the timely payment of principal and interest. If
callable, these bonds may still be subject to call prior to maturity.
(c) Auction rate security. The coupon rate shown represents the rate as of June
30, 2008.
(d) Zero coupon bonds make no periodic interest payments, but are issued at
deep discounts from par value. The rate shown is the effective yield at
June 30, 2008.
(e) Convertible Capital Appreciation Bonds (Convertible CABs) - These bonds
initially pay no interest but accrete in value from the date of issuance
through the conversion date, at which time the bonds start to accrue and
pay interest on a semiannual basis until final maturity.
(f) Investment in affiliated security. This money market fund is advised by FAF
Advisors, Inc., which also serves as advisor for this fund.
ACA - American Capital Access
AGTY - Assured Guaranty
AMBAC - American Municipal Bond Assurance Corporation
AMT - Alternative Minimum Tax. As of June 30, 2008, the aggregate market value
of securities subject to the AMT was $2,493, which represents 3.3% of net
assets.
CIFG - CDC IXIS Financial Guaranty
COMTGY - Commonwealth Guaranty
FGIC - Financial Guaranty Insurance Corporation
FSA - Financial Security Assurance
LOC - Letter of Credit
MBIA - Municipal Bond Insurance Association
RAAI - Radian Asset Assurance Inc.
SMO - State Moral Obligation
STAID - State Aid Withholding
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
B-32
FIRST AMERICAN COLORADO TAX FREE FUND
FIRST AMERICAN COLORADO INTERMEDIATE TAX FREE FUND
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 2008 (000'S OMITTED)
1. Basis of Combination
The accompanying Unaudited Pro Forma Combined Financial Statements
including the Statements of Assets and Liabilities, Statements of
Operations, and Schedule of Investments (Collectively, "Unaudited Pro Forma
Financial Statements") reflect the accounts of Colorado Tax Free Fund (the
"acquiring fund") and Colorado Intermediate Tax Free Fund (the "acquired
fund"), each a series of First American Investment Funds, Inc. The
Statements of Assets and Liabilities and Schedule of Investments reflect
fund information as if the proposed reorganization occurred as of June 30,
2008. The Statement of Operations reflects fund information as if the
proposed reorganization was in effect for the twelve month period ended
June 30, 2008. The Unaudited Pro Forma Financial Statements have been
derived from books and records utilized in calculating daily net asset
values of Colorado Tax Free Fund and Colorado Intermediate Tax Free Fund at
June 30, 2008.
The Plan of Reorganization provides that at the time the reorganization
becomes effective (the "Effective Time of the Reorganization")
substantially all of the assets and liabilities of the acquired fund will
become assets and liabilities of the acquiring fund. In exchange for the
transfer of assets and liabilities, the acquiring fund will issue to the
acquired fund full and fractional shares of the designated share classes of
the acquiring fund, and the acquired fund will make a liquidating
distribution of such shares to its shareholders. The number of shares of
the acquiring fund so issued will be in equal value to the full and
fractional shares of the acquired fund that are outstanding immediately
prior to the Effective Time of the Reorganization. At and after the
Effective Time of the Reorganization, all debts, liabilities and
obligations of the acquired fund will attach to the acquiring fund and may
thereafter be enforced against the acquiring fund to the same extent as if
the acquiring fund had incurred them. The Unaudited Pro Forma Financial
Statements give effect to the proposed transfer described above.
The Unaudited Pro Forma Financial Statements reflect the combined results
of operations of the acquired and acquiring funds. However, should such
reorganization be effected, the Statements of Operations of the acquiring
fund will not be restated for pre-combination period results of the
acquired fund. The Unaudited Pro Forma Financial Statements should be read
in conjunction with the historical financial statements of each Fund
incorporated by reference in the Statement of Additional Information.
2. Service Providers
FAF Advisors, Inc. (the "Advisor"), a subsidiary of U.S. Bank National
Association ("U.S. Bank"), will serve as the combined fund's investment
advisor and administrator. U.S. Bancorp Fund Services, LLC ("USBFS") will
serve as sub-administrator and transfer agent to the fund. U.S. Bank will
serve as the custodian to the fund.
3. Share Classes and Fees
The acquiring fund has Class A, Class C, and Class Y shares, which have
identical voting, dividend, liquidation, and other rights, and the same
terms and conditions, except that certain fees and expenses, including
distribution and shareholder servicing fees, may differ among classes. Each
class has
B-33
exclusive voting rights on any matters relating to that class' servicing or
distribution arrangements. Class A shares of Colorado Intermediate Tax Free
Fund are sold with a maximum front-end sales charge of 2.25% and Class A
shares of Colorado Tax Free Fund are sold with a maximum front-end sales
charge of 4.25%. Class C shares, offered only by Colorado Tax Free Fund,
may be subject to a contingent deferred sales charge of 1.00% for 12
months. Class Y shares of both Funds have no sales charge and are offered
only to qualifying institutional investors and certain other qualifying
accounts. More information on the classes of shares offered can be found in
the Proxy Statement/Prospectus.
The investment advisory fees and distribution fees (less any fee waivers or
expense reimbursements in effect during the period) have been charged to
the combined Fund based on the fee schedule in effect for Colorado Tax Free
Fund at the combined level of average net assets for the periods ended June
30, 2008. The Advisor has contractually agreed to waive fees and reimburse
expenses during the current fiscal year so that total fund operating
expenses do not exceed 0.75%, 1.15% and 0.50%, respectively, for Class A,
Class C and Class Y shares. These fee waivers may be terminated at any time
after October 31, 2009, at the discretion of the Advisor.
4. Unaudited Pro Forma Adjustments and Unaudited Pro Forma Combined Columns
The Unaudited Pro Forma Combined Statements of Operations assume similar
rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of
each Fund's gross investment income. Unaudited Pro Forma operating expenses
include the actual expenses of the Funds adjusted to reflect the expected
expenses of the combined entity.
5. Portfolio Valuation, Securities Transactions and Related Income
Securities are valued at market value. Short-term investments maturing in
60 days or less are valued at amortized cost, which approximates market
value. For financial reporting purposes, security transactions are
accounted for on a trade date basis. Net realized gains or losses from
sales of securities are determined by comparing the net sale proceeds to an
identified cost basis. Interest income, including amortization of bond
premium and discount, and expenses are recorded on an accrual basis.
6. Capital Shares
The Unaudited Pro Forma net asset values per share assume the issuance of
Class A and Y shares of the Colorado Tax Free Fund which would have been
issued at June 30, 2008 in connection with the proposed Reorganization.
Shareholders of the Colorado Intermediate Tax Free Fund would receive Class
A and Class Y shares of the Colorado Tax Free Fund based on conversion
ratios determined on June 30, 2008. The conversion ratios are calculated by
dividing the net asset value of the Colorado Intermediate Tax Free Fund by
the net asset value per share of the respective class of the Colorado Tax
Free Fund.
7. Merger Costs
All costs associated with the Reorganization will be paid by the Advisor.
B-34
PART C
FORM N-14
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The Registrant's Articles of Incorporation and Bylaws provide that each
present or former director, officer, agent and employee of the Registrant or any
predecessor or constituent corporation, and each person who, at the request of
the Registrant, serves or served another business enterprise in any such
capacity, and the heirs and personal representatives of each of the foregoing
shall be indemnified by the Registrant to the fullest extent permitted by law
against all expenses, including without limitation amounts of judgments, fines,
amounts paid in settlement, attorneys' and accountants' fees, and costs of
litigation, which shall necessarily or reasonably be incurred by him or her in
connection with any action, suit or proceeding to which he or she was, is or
shall be a party, or with which he or she may be threatened, by reason of his or
her being or having been a director, officer, agent or employee of the
Registrant or such predecessor or constituent corporation or such business
enterprise, whether or not he or she continues to be such at the time of
incurring such expenses. Such indemnification may include without limitation the
purchase of insurance and advancement of any expenses, and the Registrant shall
be empowered to enter into agreements to limit the liability of directors and
officers of the Registrant. No indemnification shall be made in violation of the
General Corporation Law of the State of Maryland or the Investment Company Act
of 1940 (the "1940 Act"). The Registrant's Articles of Incorporation and Bylaws
further provide that no director or officer of the Registrant shall be liable to
the Registrant or its stockholders for money damages, except (i) to the extent
that it is proved that such director or officer actually received an improper
benefit or profit in money, property or services, for the amount of the benefit
or profit in money, property or services actually received, or (ii) to the
extent that a judgment or other final adjudication adverse to such director or
officer is entered in a proceeding based on a finding in the proceeding that
such director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. The foregoing shall not be construed to protect or purport to
protect any director or officer of the Registrant against any liability to the
Registrant or its stockholders to which such director or officer would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such office. 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, (the "1933 Act") 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 the 1933 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 1933
Act, as amended, and will be governed by the final adjudication of
1
such issue. The Registrant maintains officers' and directors' liability
insurance providing coverage, with certain exceptions, for acts and omissions in
the course of the covered persons' duties as officers and directors.
ITEM 16. EXHIBITS.
(1)(a) 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)).
(1)(b) 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)).
(1)(c) 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)).
(1)(d) 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)).
(1)(e) 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)).
(1)(f) 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)).
(1)(g) 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)).
(1)(h) 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)).
(1)(i) Articles Supplementary designating new series (Incorporated by reference
to Exhibit (a)(9) to Post-Effective Amendment No. 84, filed on December
20, 2006 (File Nos. 033-16905, 811-05309)).
(1)(j) Articles Supplementary designating new series (Incorporated by reference
to Exhibit (a)(10) to Post-Effective Amendment No. 87, filed on July 31,
2007 (File Nos. 033-16905, 811-05309)).
(1)(k) Articles Supplementary designating new series (Incorporated by reference
to Exhibit (a)(11) to Post-Effective Amendment No. 90, filed on December
17, 2007 (File Nos. 033-16905, 811-05309)).
(1)(l) Articles Supplementary designating new share classes (Incorporated by
reference to Exhibit (a)(12) to Post-Effective Amendment No. 93, filed
on October 28, 2008 (File Nos. 033-16905, 811-05309)).
(2)(a) Bylaws, as amended (Incorporated by reference to Exhibit (b) to
Post-Effective Amendment No. 93, filed on October 28, 2008 (File Nos.
033-16905, 811-05309)).
2
(3) Not applicable.
(4) Agreement and Plan of Reorganization - constitutes Appendix A to Part A
hereof.
(5) Not applicable.
(6)(a) 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)).
(6)(b) 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)).
(6)(c) Amendment to Investment Advisory Agreement dated May 3, 2007 relating to
authority to appoint a sub-advisor to any series of the Registrant
(Incorporated by reference to Exhibit (d)(3) to Post-Effective Amendment
No. 86, filed on May 17, 2007 (File Nos. 033-16905, 811-05309)).
(6)(d) Exhibit A to Investment Advisory Agreement, effective December 5, 2007
(Incorporated by reference to Exhibit (d)(4) to Post-Effective Amendment
No. 90, filed on December 17, 2007 (File Nos. 033-16905, 811-05309)).
(6)(e) Expense Limitation Agreement between Registrant and FAF Advisors, Inc.,
dated February 29, 2008, effective through February 28, 2009, with
respect to certain Equity Funds (Incorporated by reference to Exhibit
(d)(5) to Post-Effective Amendment No. 91, filed on February 29, 2008
(File Nos. 033-16905, 811-05309)).
(6)(f) Expense Limitation and Fee Reimbursement Agreement between Registrant
and FAF Advisors, Inc., dated October 28, 2008, effective through
October 31, 2009, with respect to certain Bond Funds (Incorporated by
reference to Exhibit (d)(6) to Post-Effective Amendment No. 93, filed on
October 28, 2008 (File Nos. 033-16905, 811-05309)).
(6)(g) Expense Limitation Agreement between Registrant and FAF Advisors, Inc.,
dated September 3, 2008, effective through October 31, 2009, with
respect to Global Infrastructure Fund (Incorporated by reference to
Exhibit (d)(7) to Post-Effective Amendment No. 92, filed on September 3,
2008 (File Nos. 033-16905, 811-05309)).
3
(6)(h) Sub-Advisory Agreement dated November 27, 2006, by and between FAF
Advisors, Inc. and Altrinsic Global Advisors, LLC with respect to
International Select Fund (Incorporated by reference to Exhibit (d)(6)
to Post-Effective Amendment No. 84, filed on December 20, 2006 (File
Nos. 033-16905, 811-05309)).
(6)(i) Letter of Agreement dated March 28, 2007, by and between FAF Advisors
and Altrinsic Global Advisors, LLC with respect to International Select
Fund (Incorporated by reference to Exhibit (d)(11) to Post-Effective
Amendment No. 87, filed on July 31, 2007 (File Nos. 033-16905,
811-05309)).
(6)(j) Amendment to Sub-Advisory Agreement dated May 3, 2007, by and between
FAF Advisors, Inc. and Altrinsic Global Advisors, LLC with respect to
International Select Fund (Incorporated by reference to Exhibit (d)(12)
to Post Effective Amendment No. 86, filed on May 17, 2007 (File Nos.
033-16905, 811-05309)).
(6)(k) Sub-Advisory Agreement dated February 22, 2007, by and between FAF
Advisors, Inc. and Hansberger Global Investors, Inc. with respect to
International Select Fund (Incorporated by reference to Exhibit (d)(13)
to Post-Effective Amendment No. 87, filed on July 31, 2007 (File Nos.
033-16905, 811-05309)).
(6)(l) Letter of Agreement dated March 28, 2007, by and between FAF Advisors
and Hansberger Global Investors, Inc. with respect to International
Select Fund (Incorporated by reference to Exhibit (d)(14) to
Post-Effective Amendment No. 87, filed on July 31, 2007 (File Nos.
033-16905, 811-05309)).
(6)(m) Amendment to Sub-Advisory Agreement dated May 3, 2007, by and between
FAF Advisors, Inc. and Hansberger Global Investors, Inc. with respect to
International Select Fund (Incorporated by reference to Exhibit (d)(13)
to Post Effective Amendment No. 86, filed on May 17, 2007 (File Nos.
033-16905, 811-05309)).
(6)(n) Sub-Advisory Agreement dated November 27, 2006, by and between FAF
Advisors, Inc. and Lazard Asset Management LLC with respect to
International Select Fund (Incorporated by reference to Exhibit (d)(8)
to Post-Effective Amendment No. 84, filed on December 20, 2006 (File
Nos. 033-16905, 811-05309)).
(6)(o) Letter of Agreement dated March 28, 2007, by and between FAF Advisors
and Lazard Asset Management LLC with respect to International Select
Fund (Incorporated by reference to Exhibit (d)(17) to Post-Effective
Amendment No. 87, filed on July 31, 2007 (File Nos. 033-16905,
811-05309)).
(6)(p) Amendment to Sub-Advisory Agreement dated May 3, 2007, by and between
FAF Advisors, Inc. and Lazard Asset Management LLC with respect to
International Select
4
Fund (Incorporated by reference to Exhibit (d)(14) to Post Effective
Amendment No. 86, filed on May 17, 2007 (File Nos. 033-16905,
811-05309)).
(7)(a) Distribution Agreement between the Registrant and Quasar Distributors,
LLC, effective July 1, 2007 (Incorporated by reference to Exhibit (e)(1)
to Post-Effective Amendment No. 87, filed on July 31, 2007 (File Nos.
033-16905, 811-05309)).
(7)(b) Fee Limitation Agreement between Registrant and Quasar Distributors,
LLC, dated October 28, 2008, effective through October 31, 2009, with
respect to certain Bond Funds (Incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 93, filed on October 28, 2008
(File Nos. 033-16905, 811-05309)).
(7)(c) Form of Dealer Agreement (Incorporated by reference to Exhibit (e)(3) to
Post-Effective Amendment No. 88, filed on October 3, 2007 (File Nos.
033-16905, 811-05309)).
(8)(a) Deferred Compensation Plan for Directors dated January 1, 2000, as
amended December 2007 (Incorporated by reference to Exhibit (f)(1) to
Post-Effective Amendment No. 93, filed October 28, 2008 (File Nos.
033-16905, 811-05309)).
(8)(b) Deferred Compensation Plan for Directors, Summary of Terms as Amended
December 2007 (Incorporated by reference to Exhibit (f)(2) to
Post-Effective Amendment No. 93, filed October 28, 2008 (File Nos.
033-16905, 811-05309)).
(9)(a) Custody Agreement dated July 1, 2006, between the Registrant and U.S.
Bank National Association (Incorporated by reference to Exhibit (g)(1)
to Post-Effective Amendment No. 80, Filed on August 31, 2006 (File Nos.
033-16905, 811-05309)).
(9)(b) Amendment to Custody Agreement dated July 1, 2007, by and between
Registrant and U.S. Bank National Association (Incorporated by reference
to Exhibit (g)(2) to Post-Effective Amendment No. 87, filed on July 31,
2007 (File Nos. 033-16905, 811-05309)).
(9)(c) Exhibit C effective June 20, 2007 to Custody Agreement dated July 1,
2006 (Incorporated by reference to Exhibit (g)(3) to Post-Effective
Amendment No. 87, filed on July 31, 2007 (File Nos. 033-16905,
811-05309)).
(9)(d) Exhibit D effective December 5, 2007 to Custody Agreement dated July 1,
2006 (Incorporated by reference to Exhibit (g)(4) to Post-Effective
Amendment No. 90, filed on December 17, 2007 (File Nos. 033-16905,
811-05309)).
(9)(e) 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)).
(9)(f) Letter Amendment dated November 21, 2006 to the Custodian Agreement
dated July 1, 2005 by and between Registrant and State Street Bank and
Trust Company with respect to International Select Fund (Incorporated by
reference to Exhibit (g)(3) to Post-Effective Amendment No. 84, filed on
December 20, 2006 (File Nos. 033-16905, 811-05309)).
(9)(g) Letter Amendment dated December 6, 2007 to the Custodian Agreement dated
July 1, 2005 by and between Registrant and State Street Bank and Trust
Company with respect
5
to Global Infrastructure Fund (Incorporated by reference to Exhibit
(g)(7) to Post-Effective Amendment No. 90, filed on December 17, 2007
(File Nos. 033-16905, 811-05309)).
(10)(a) Amended and Restated Distribution and Service Plan for Class A, B, C,
and R shares, effective September 19, 2006 (Incorporated by reference to
Exhibit (m) to Post-Effective Amendment No. 87, filed on July 31, 2007
(File Nos. 033-16905, 811-05309)).
(10)(b) Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3,
effective December 5, 2007 (Incorporated by reference to Exhibit (n) to
Post-Effective Amendment No. 90, filed on December 17, 2007 (File Nos.
033-16905, 811-05309)).
(11) Opinion and Consent of Dorsey & Whitney LLP as to the legality of the
securities being registered (Incorporated by reference to Exhibit 11 on
Form N-14 Filed on October 10, 2008 (File No. 033-16905)).
(12) Opinion and Consent of Dorsey & Whitney LLP supporting the tax matters
discussed in the prospectus.**
(13)(a) Administration Agreement dated July 1, 2006, by and between Registrant
and FAF Advisors, Inc. (Incorporated by reference to Exhibit (h)(1) to
Post-Effective Amendment No. 80, Filed on August 31, 2006 (File Nos.
033-16905, 811-05309)).
(13)(b) Schedule A to Administration Agreement dated July 1, 2006 between
Registrant and FAF Advisors, Inc. (Incorporated by reference to Exhibit
(h)(2) to Post-Effective Amendment No. 80, Filed on August 31, 2006
(File Nos. 033-16905, 811-05309)).
(13)(c) 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)).
(13)(d) Transfer Agent and Shareholder Servicing Agreement dated September 19,
2006, by and among Registrant, U.S. Bancorp Fund Services, LLC, and FAF
Advisors, Inc. (Incorporated by reference to Exhibit (h)(4) to
Post-Effective Amendment No. 87, filed on July 31, 2007 (File Nos.
033-16905, 811-05309)).
(13)(e) Exhibit A to Transfer Agent and Shareholder Servicing Agreement
effective April 1, 2007(Incorporated by reference to Exhibit (h)(5) to
Post-Effective Amendment No. 93, filed on October 28, 2008 (File Nos.
033-16905, 811-05309)).
(14) Consent of Ernst & Young LLP with respect to financial statements of
Registrant.*
(15) Not applicable.
(16) Power of Attorney dated September 24, 2008 (Incorporated by reference
to Exhibit 16 on Form N-14 filed on October 10, 2008 (File No.
033-16905)).
(17)(a) Form of Proxy for Special Meeting of Shareholders of California
Intermediate Tax Free Fund to be held on December 15, 2008.*
(17)(b) Form of Proxy for Special Meeting of Shareholders of Colorado
Intermediate Tax Free Fund to be held on December 15, 2008.*
(17)(c) First American Tax Free Income Funds Prospectus, dated October 28,
2008.*
(17)(d) First American Short & Intermediate Tax Free Income Funds Prospectus,
dated October 28, 2008.*
(17)(e) First American Investment Funds, Inc. Statement of Additional
Information (relating to Tax Free and Bond Funds), dated October
28, 2008.*
(17)(f) First American Funds 2008 Annual Report - Tax Free Income Funds, dated
June 30, 2008.*
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the 1933 Act, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial BONA FIDE offering of them.
(3) The undersigned Registrant agrees to file an amendment to the
Registration Statement, pursuant to Rule 485(b) of Regulation C of the 1933 Act,
for the purpose of including Exhibit 12, Opinion and consent of Dorsey & Whitney
LLP regarding tax matters, within a reasonable time after closing of the
Reorganizations.
6
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Minneapolis, and the
State of Minnesota on the 17th day of November, 2008.
FIRST AMERICAN INVESTMENT FUNDS, INC.
By /s/ Thomas S. Schreier, Jr.
---------------------------------
Name: Thomas S. Schreier, Jr.
Title: President
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title
---------- -----
/s/ Thomas S. Schreier, Jr. President November 17, 2008
-------------------------------------
Thomas S. Schreier, Jr.
/s/ Charles D. Gariboldi Treasurer (principal financial/ November 17, 2008
------------------------------------- accounting officer)
Charles D. Gariboldi
/s/ * Virginia L. Stringer Chair of the Board and Director November 17, 2008
-------------------------------------
Virginia L. Stringer
/s/ * Benjamin R. Field III Director November 17, 2008
-------------------------------------
Benjamin R. Field III
/s/ * Roger A. Gibson Director November 17, 2008
-------------------------------------
Roger A. Gibson
/s/ * Victoria J. Herget Director November 17, 2008
-------------------------------------
Victoria J. Herget
/s/ * John P. Kayser Director November 17, 2008
-------------------------------------
John P. Kayser
/s/ * Leonard W. Kedrowski Director November 17, 2008
-------------------------------------
Leonard W. Kedrowski
/s/ * Richard K. Riederer Director November 17, 2008
-------------------------------------
Richard K. Riederer
/s/ * Joseph D. Strauss Director November 17, 2008
-------------------------------------
Joseph D. Strauss
/s/ * James M. Wade Director November 17, 2008
-------------------------------------
James M. Wade
*By /s/ Richard J. Ertel
---------------------------------
Attorney-in-Fact
* Pursuant to powers of attorney filed herewith.
INDEX TO EXHIBITS
EXHIBIT NUMBER NAME OF EXHIBIT
-------------- ---------------
(14) Consent of Ernst & Young LLP
(17)(a) Form of Proxy Card (California Intermediate Tax Free Fund)
(17)(b) Form of Proxy Card (Colorado Intermediate Tax Free Fund)
(17)(c) First American Tax Free Income Funds Prospectus
(17)(d) First American Short & Intermediate Tax Free Income Funds
Prospectus
(17)(e) First American Tax Free and Bond Funds Statement of Additional
Information
(17)(f) First American Funds Annual Report - Tax Free Income Funds
EXHIBIT (14)
Consent of Independent Registered Public Accounting Firm
We consent to the references to our firm under the captions "Financial
Highlights," "Miscellaneous," and in Sections 4.1(f) and 4.2(g) of
"Representations, Warranties and Covenants" in the Prospectus and to the
incorporation by reference of our reports, dated August 20, 2008, of the
California Intermediate Tax Free Fund, the Colorado Intermediate Tax Free Fund,
the California Tax Free Fund, and the Colorado Tax Free Fund (collectively
referred to herein as the Tax Free Funds) as included in the Annual Report to
Shareholders for the year ended June 30, 2008, in the Statement of Additional
Information, as included in this Registration Statement for the Tax Free Funds,
a series of funds within First American Investment Funds, Inc., on Form N-14
(No. 811-05309).
Additionally, we consent:
- To the reference to our firm under the caption "Independent Registered
Public Accounting Firm" and to reference of our report in the Annual
Report to Shareholders of the Tax Free Funds as included in the
Statement of Additional Information, dated August 20, 2007, which is
incorporated by reference in the Statement of Additional Information
in this Registration Statement for the Tax Free Funds, a series of
funds within First American Funds, Inc., on Form N-14 (No. 811-05309).
- To the reference of our report in the Annual Report to Shareholders of
the Tax Free Funds, a series of funds within First American Funds,
Inc., dated August 20, 2008, which is incorporated by reference in the
Statement of Additional Information in this Registration Statement for
the Tax Free Funds, a series of funds within First American Funds,
Inc., on Form N-14 (No. 811-05309).
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 8, 2008
EXHIBIT (17)(A)
(FIRST AMERICAN FUNDS LOGO)
PROXY CARD
CALIFORNIA INTERMEDIATE TAX FREE FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 15, 2008
The undersigned appoints Charles D. Gariboldi, Jr., Kathleen L. Prudhomme,
Jeffery M. Wilson, and Richard J. Ertel, or any one of them, as proxies of the
undersigned, with full power of substitution, to cast all eligible votes held by
the undersigned in the California Intermediate Tax Free Fund series of First
American Investment Funds, Inc. ("FAIF") at a Special Meeting of Shareholders,
to be held in Room A on the 3rd floor at 800 Nicollet Mall, Minneapolis,
Minnesota 55402, on December 15, 2008, at 10:00 a.m., Central Time, and at any
adjournment thereof, with all powers the undersigned would possess if present in
person. All previous proxies given with respect to the meeting are revoked.
Receipt of the Notice of Special Meeting of Shareholders and the accompanying
Prospectus/Proxy Statement is hereby acknowledged.
THIS PROXY WILL BE VOTED AS INSTRUCTED ON THE MATTER SET FORTH BELOW. IT IS
UNDERSTOOD THAT IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE
PROPOSAL. UPON ALL OTHER MATTERS THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST
INTERESTS OF CALIFORNIA INTERMEDIATE TAX FREE FUND. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
NOTE: Please sign exactly as your name appears on this
Proxy. When signing in a fiduciary capacity, such as
executor, administrator, trustee, attorney, guardian,
etc., please so indicate. Corporate and partnership
proxies should be signed by an authorized person
indicating the person's title.
-------------------------------------------------------
Signature (Title if Applicable) Date
-------------------------------------------------------
Signature (if held jointly) Date
--------------------------------------------------------------------------------
(Triangle) FOLD HERE (Triangle)
YOUR VOTE IS IMPORTANT, NO MATTER HOW MANY SHARES YOU OWN. THE MATTERS WE ARE
SUBMITTING FOR YOUR CONSIDERATION ARE SIGNIFICANT TO THE FUND AND TO YOU AS A
FUND SHAREHOLDER. PLEASE TAKE THE TIME TO READ THE PROXY STATEMENT AND CAST YOUR
VOTE BY EXECUTING THIS PROXY CARD AND ENCLOSING IT IN THE POSTAGE PAID ENVELOPE
PROVIDED.
1. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION FOR CALIFORNIA
INTERMEDIATE TAX FREE FUND, PROVIDING FOR REORGANIZATION OF THAT FUND
INTO THE CALIFORNIA TAX FREE FUND SERIES OF FAIF, INCLUDING THE
AMENDMENT TO FAIF'S AMENDED AND RESTATED ARTICLES OF INCORPORATION
NECESSARY TO EFFECT THE REORGANIZATION.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
TAG ID: ___________ "Scanner Bar Code" CUSIP: _____
EXHIBIT (17)(B)
(FIRST AMERICAN FUNDS LOGO)
PROXY CARD
COLORADO INTERMEDIATE TAX FREE FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 15, 2008
The undersigned appoints Charles D. Gariboldi, Jr., Kathleen L. Prudhomme,
Jeffery M. Wilson, and Richard J. Ertel, or any one of them, as proxies of the
undersigned, with full power of substitution, to cast all eligible votes held by
the undersigned in the Colorado Intermediate Tax Free Fund series of First
American Investment Funds, Inc. ("FAIF") at a Special Meeting of Shareholders,
to be held in Room A on the 3rd floor at 800 Nicollet Mall, Minneapolis,
Minnesota 55402, on December 15, 2008, at 10:00 a.m., Central Time, and at any
adjournment thereof, with all powers the undersigned would possess if present in
person. All previous proxies given with respect to the meeting are revoked.
Receipt of the Notice of Special Meeting of Shareholders and the accompanying
Prospectus/Proxy Statement is hereby acknowledged.
THIS PROXY WILL BE VOTED AS INSTRUCTED ON THE MATTER SET FORTH BELOW. IT IS
UNDERSTOOD THAT IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE
PROPOSAL. UPON ALL OTHER MATTERS THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST
INTERESTS OF COLORADO INTERMEDIATE TAX FREE FUND. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
NOTE: Please sign exactly as your name
appears on this Proxy. When signing in a
fiduciary capacity, such as executor,
administrator, trustee, attorney, guardian,
etc., please so indicate. Corporate and
partnership proxies should be signed by an
authorized person indicating the person's
title.
---------------------------------------------
Signature (Title if Applicable) Date
---------------------------------------------
Signature (if held jointly) Date
--------------------------------------------------------------------------------
(Triangle) FOLD HERE (Triangle)
YOUR VOTE IS IMPORTANT, NO MATTER HOW MANY SHARES YOU OWN. THE MATTERS WE ARE
SUBMITTING FOR YOUR CONSIDERATION ARE SIGNIFICANT TO THE FUND AND TO YOU AS A
FUND SHAREHOLDER. PLEASE TAKE THE TIME TO READ THE PROXY STATEMENT AND CAST YOUR
VOTE BY EXECUTING THIS PROXY CARD AND ENCLOSING IT IN THE POSTAGE PAID ENVELOPE
PROVIDED.
1. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION FOR COLORADO
INTERMEDIATE TAX FREE FUND, PROVIDING FOR REORGANIZATION OF THAT FUND
INTO THE COLORADO TAX FREE FUND SERIES OF FAIF, INCLUDING THE
AMENDMENT TO FAIF'S AMENDED AND RESTATED ARTICLES OF INCORPORATION
NECESSARY TO EFFECT THE REORGANIZATION.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
TAG ID: ___________ "Scanner Bar Code" CUSIP: _____
(FIRST AMERICAN FUNDS LOGO)
October 28, 2008 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.
TABLE OF
CONTENTS
<Table>
<Caption>
FUND SUMMARIES
Objectives, Principal Investment Strategies, and Principal
Risks 2
Fund Performance
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
Fees and Expenses 12
MORE ABOUT THE FUNDS
Investment Strategies and Other Investment Matters 15
POLICIES AND SERVICES
Purchasing, Redeeming, and Exchanging Shares 16
Managing Your Investment 25
ADDITIONAL INFORMATION
Management 27
Financial Highlights 29
FOR MORE INFORMATION Back Cover
</Table>
Please find FIRST AMERICAN FUNDS' PRIVACY POLICY inside the back cover of this
Prospectus.
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 (SAI) 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.
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.
1
Prospectus - First American Tax Free Income Funds
Fund Summaries
Objectives, Principal Investment Strategies, and Principal Risks
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:
STATE-SPECIFIC FUNDS -- providing maximum current income that is exempt from
both federal income tax and from the income tax of the state specified in the
fund's name, 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 INVESTMENT STRATEGIES
Under normal market conditions, as a fundamental policy, 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 and, in the case of California Tax Free Fund,
Colorado Tax Free Fund, and Minnesota Tax Free Fund, the 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 the
federal alternative minimum tax and applicable state alternative minimum tax, if
any.
Each fund may invest in:
- "general obligation" bonds;
- "revenue" bonds;
- participation interests in municipal leases; and
- zero coupon municipal securities.
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 20% 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"). 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 will attempt to maintain the weighted average maturity of its
portfolio securities at 10 to 25 years under normal market conditions.
The fund may utilize futures contracts and options on futures contracts in an
attempt to manage market risk, credit risk and yield curve risk, and to manage
the effective maturity or duration of securities in the fund's portfolio. The
fund may not use such instruments 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 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 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 its benchmark or 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.
Futures Risk. The use of futures contracts exposes a fund to additional risks
and transaction costs. Risks inherent in the use of futures contracts include:
the risk that securities prices, index prices, or interest rates will not move
in the direction that
2
Prospectus - First American Tax Free Income Funds
Fund Summaries
Objectives, Principal Investment Strategies, and Principal Risks CONTINUED
the advisor anticipates; an imperfect correlation between the price of the
futures contract 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 a futures contract can result
in a loss substantially greater than the fund's initial investment in that
futures contract; and 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 futures contracts and the advisor's judgment
proves incorrect, the fund's performance could be worse than if it had not used
these instruments.
High-Yield Securities Risk. Each fund may invest in high-yield securities.
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. High-yield securities may be more
susceptible to real or perceived adverse economic conditions than investment
grade securities. 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), 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.
Liquidity Risk. Each fund is exposed to liquidity risk because of its
investment in high-yield securities. 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.
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.
3
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
4.74% 9.36% 5.23% 5.40% 2.83% 4.33% 1.23%
2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 5.00%
Worst Quarter:
Quarter ended June 30, 2004 (2.54)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
---------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/1/00 (3.07)% 2.90% 5.25%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (3.11)% 2.79% 5.16%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) (0.54)% 3.06% 5.14%
---------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/00 (0.14)% 3.38% 5.40%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/1/00 1.48% 4.05% 6.08%
---------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 6.08%
---------------------------------------------------------------------------------------------------------------------
Lipper Arizona Municipal Debt Funds Category Average(3)
(reflects no deduction for sales charges or taxes) 1.31% 3.54% 5.18%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (4.89)%.
(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 Arizona.
4
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
4.31% 9.33% 4.98% 4.76% 2.93% 4.44% 2.46%
2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 5.92%
Worst Quarter:
Quarter ended June 30, 2004 (2.34)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
---------------------------------------------------------------------------------------------------------------------
California Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/1/00 (1.92)% 3.02% 5.46%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (1.99)% 2.92% 5.35%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) 0.20% 3.14% 5.29%
---------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/00 1.04% 3.49% 5.63%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/1/00 2.59% 4.16% 6.29%
---------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 6.08%
---------------------------------------------------------------------------------------------------------------------
Lipper California Municipal Debt Funds Category
Average(3)
(reflects no deduction for sales charges or taxes) 0.42% 3.61% 5.43%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (4.72)%.
(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 California.
5
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
5.35% 10.35% 5.26% 4.27% 3.09% 4.12% 0.45%
2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 5.55%
Worst Quarter:
Quarter ended June 30, 2004 (2.28)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
---------------------------------------------------------------------------------------------------------------------
Colorado Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/1/00 (3.81)% 2.54% 5.23%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (3.86)% 2.35% 5.09%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) (0.96)% 2.76% 5.14%
---------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/00 (0.91)% 3.03% 5.39%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/1/00 0.70% 3.68% 6.08%
---------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 6.08%
---------------------------------------------------------------------------------------------------------------------
Lipper Colorado Municipal Debt Funds Category Average(3)
(reflects no deduction for sales charges or taxes) 1.63% 3.61% 5.48%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (3.56)%.
(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 Colorado.
6
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
6.40% (2.92)% 9.60% 4.62% 8.56% 5.18% 3.73% 4.26% 4.61% (0.02)%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.23%
Worst Quarter:
Quarter ended June 30, 2004 (2.26)%
</Table>
<Table>
<Caption>
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07(2) Date One Year Five Years Ten Years (Class C)
----------------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund
----------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 7/11/88 (4.30)% 2.64% 3.89% N/A
----------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (4.38)% 2.56% 3.82% N/A
----------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions
and sale of fund shares) (1.30)% 2.84% 3.94% N/A
----------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/1/99 (1.41)% 3.12% N/A 3.63%
----------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 8/1/97 0.19% 3.78% 4.59% N/A
----------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or
taxes) 3.36% 4.30% 5.18% 4.94%
----------------------------------------------------------------------------------------------------------------------------
Lipper Minnesota Municipal Debt Funds Category
Average(4)
(reflects no deduction for sales charges or
taxes) 1.11% 3.48% 4.14% 3.84%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (4.23)%.
(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.
(4)Represents funds that invest primarily in those securities that provide
income that is exempt from taxation in Minnesota.
7
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
5.41% (2.85)% 10.88% 4.10% 9.42% 5.11% 3.54% 2.76% 4.14% 1.58%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.86%
Worst Quarter:
Quarter ended June 30, 2004 (2.25)%
</Table>
<Table>
<Caption>
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07(2) Date One Year Five Years Ten Years (Class C)
----------------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund
----------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 9/28/90 (3.05)% 2.29% 3.65% N/A
----------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 9/24/01 (0.12)% 2.75% N/A 3.37%
----------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 7/15/88 1.58% 3.43% 4.39% N/A
----------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions) 1.54% 3.35% 4.31% N/A
----------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions
and sale of fund shares) 2.52% 3.51% 4.35% N/A
----------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or
taxes) 3.36% 4.30% 5.18% 4.85%
----------------------------------------------------------------------------------------------------------------------------
Lipper Missouri Municipal Debt Funds Category
Average(4)
(reflects no deduction for sales charges or
taxes) 1.38% 3.47% 4.28% 4.00%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (3.80)%.
(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.
(4)Represents funds that invest primarily in those securities that provide
income that is exempt from taxation in Missouri.
8
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
10.19% 4.97% 3.96% 3.02% 4.07% 1.67%
2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.97%
Worst Quarter:
Quarter ended June 30, 2004 (2.34)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
---------------------------------------------------------------------------------------------------------------------
Nebraska Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/28/01 (2.68)% 2.64% 3.87%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (2.76)% 2.59% 3.83%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) (0.29)% 2.81% 3.89%
---------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 2/28/01 0.31% 3.15% 4.06%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/28/01 2.02% 3.81% 4.79%
---------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 5.09%
---------------------------------------------------------------------------------------------------------------------
Lipper Other States Municipal Debt Funds Category
Average(3)
(reflects no deduction for sales charges or taxes) 1.88% 3.33% 4.03%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (3.97)%.
(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.
9
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
4.89% 3.77% 2.64% 4.11% 2.25%
2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2004 4.12%
Worst Quarter:
Quarter ended June 30, 2004 (2.50)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
---------------------------------------------------------------------------------------------------------------------
Ohio Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 4/30/02 (2.08)% 2.64% 3.57%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (2.13)% 2.57% 3.49%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) (0.03)% 2.75% 3.55%
---------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 4/30/02 0.89% 2.92% 3.75%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 4/30/02 2.60% 3.79% 4.61%
---------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 3.36% 4.30% 4.94%
---------------------------------------------------------------------------------------------------------------------
Lipper Ohio Municipal Debt Funds Category Average(3)
(reflects no deduction for sales charges or taxes) 1.97% 3.45% 4.01%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (3.98)%.
(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.
10
Prospectus - First American Tax Free Income Funds
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)
<Table>
<Caption>
5.94% (4.33)% 12.31% 3.73% 9.46% 5.83% 4.23% 4.19% 4.74% 0.03%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 5.16%
Worst Quarter:
Quarter ended June 30, 1999 (2.76)%
</Table>
<Table>
<Caption>
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07(2) Date One Year Five Years Ten Years (Class C)
----------------------------------------------------------------------------------------------------------------------------
Tax Free Fund
----------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 11/18/96 (4.23)% 2.88% 4.08% N/A
----------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) (4.31)% 2.76% 3.97% N/A
----------------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions
and sale of fund shares) (1.29)% 3.06% 4.08% N/A
----------------------------------------------------------------------------------------------------------------------------
Class C (return before taxes) 9/24/01 (1.38)% 3.37% N/A 3.95%
----------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 11/18/96 0.22% 4.03% 4.74% N/A
----------------------------------------------------------------------------------------------------------------------------
Lehman Municipal Bond Index(3)
(reflects no deduction for fees, expenses, or
taxes) 3.36% 4.30% 5.18% 4.85%
----------------------------------------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds Category
Average(4)
(reflects no deduction for sales charges or
taxes) 1.16% 3.49% 4.08% 3.94%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (5.19)%.
(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.
(4)Represents funds that invest primarily in municipal debt issues in the top
four credit ratings.
11
Prospectus - First American Tax Free Income Funds
Fund Summaries
Fees and Expenses
As an investor, you pay fees and expenses to buy and hold shares of the funds.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly since they are deducted from fund assets.
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the funds.
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES(1)
(fees paid directly from your investment) Class A(2) 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
---------------------------------------------------------------------------------------------------------------
</Table>
(1)An annual account maintenance fee of $50 may be charged under certain
circumstances. See "Policies and Services -- Purchasing, Redeeming, and
Exchanging Shares -- Additional Information on Purchasing, Redeeming, and
Exchanging Shares -- Accounts with Low Balances."
(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.
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
-----------------------------------------------------------------------------------------------------------------------
Acquired
Distribution and/or Fund Fees Total Annual
Management Service (12b-1) Other and Fund Operating
CLASS A Fees Fees(1) Expenses Expenses(2) Expenses(3)
-----------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% 0.25% 0.88% 0.01% 1.64%
California Tax Free
Fund 0.50% 0.25% 0.71% 0.01% 1.47%
Colorado Tax Free
Fund 0.50% 0.25% 1.05% 0.01% 1.81%
Minnesota Tax Free
Fund 0.50% 0.25% 0.35% 0.01% 1.11%
Missouri Tax Free
Fund 0.50% 0.25% 0.35% -- 1.10%
Nebraska Tax Free
Fund 0.50% 0.25% 0.72% -- 1.47%
Ohio Tax Free Fund 0.50% 0.25% 0.64% 0.01% 1.40%
Tax Free Fund 0.50% 0.25% 0.27% -- 1.02%
-----------------------------------------------------------------------------------------------------------------------
<Caption>
---------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
---------------------------------------------------------
Less Fee Net
CLASS A Waivers(4) Expenses(4)
---------------------------------------------------------
Arizona Tax Free Fund (0.88)% 0.76%
California Tax Free
Fund (0.81)% 0.66%
Colorado Tax Free
Fund (1.05)% 0.76%
Minnesota Tax Free
Fund (0.25)% 0.86%
Missouri Tax Free
Fund (0.15)% 0.95%
Nebraska Tax Free
Fund (0.72)% 0.75%
Ohio Tax Free Fund (0.64)% 0.76%
Tax Free Fund (0.27)% 0.75%
---------------------------------------------------------
</Table>
(1)The advisor has contractually agreed, in addition to other fee waivers and
expense reimbursements, to reimburse an amount of Class A share 12b-1 fees
equal to 0.10%, 0.10% and 0.20% of average daily net assets for California
Tax Free Fund, Minnesota Tax Free Fund and Tax Free Fund, respectively,
through October 31, 2009.
(2)In addition to the funds' total annual operating expenses that the funds bear
directly, the funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the funds invest.
(3)Total Annual Fund 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 funds' most recent annual report and
financial highlights reflect the operating expenses of the funds and do not
include Acquired Fund Fees and Expenses.
(4)The advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after waivers and excluding Acquired Fund Fees and Expenses, do not
exceed 0.65% for California Tax Free Fund, 0.75% for Arizona Tax Free Fund,
Colorado Tax Free Fund, Nebraska Tax Free Fund, Ohio Tax Free Fund, and Tax
Free Fund, 0.85% for Minnesota Tax Free Fund, and 0.95% for Missouri Tax Free
Fund. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2009, at the discretion of the advisor. Prior to that
time, such waivers and reimbursements may not be terminated without the
approval of the funds' board of directors.
12
Prospectus - First American Tax Free Income Funds
Fund Summaries
Fees and Expenses continued
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------------------
Acquired
Distribution and/or Fund Fees Total Annual
Management Service (12b-1) Other and Fund Operating
CLASS C Fees Fees Expenses Expenses(1) Expenses(2)
--------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% 0.65% 0.88% 0.01% 2.04%
California Tax Free
Fund 0.50% 0.65% 0.70% 0.01% 1.86%
Colorado Tax Free Fund 0.50% 0.65% 1.05% 0.01% 2.21%
Minnesota Tax Free
Fund 0.50% 0.65% 0.35% 0.01% 1.51%
Missouri Tax Free Fund 0.50% 0.65% 0.35% -- 1.50%
Nebraska Tax Free Fund 0.50% 0.65% 0.72% -- 1.87%
Ohio Tax Free Fund 0.50% 0.65% 0.63% 0.01% 1.79%
Tax Free Fund 0.50% 0.65% 0.28% -- 1.43%
--------------------------------------------------------------------------------------------------------------------
<Caption>
--------------------------------------------------------
Less Fee Net
CLASS C Waivers(3) Expenses(3)
--------------------------------------------------------
Arizona Tax Free Fund (0.88)% 1.16%
California Tax Free
Fund (0.70)% 1.16%
Colorado Tax Free Fund (1.05)% 1.16%
Minnesota Tax Free
Fund (0.15)% 1.36%
Missouri Tax Free Fund (0.15)% 1.35%
Nebraska Tax Free Fund (0.72)% 1.15%
Ohio Tax Free Fund (0.63)% 1.16%
Tax Free Fund (0.08)% 1.35%
--------------------------------------------------------
</Table>
(1)In addition to the funds' total annual operating expenses that the funds bear
directly, the funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the funds invest.
(2)Total Annual Fund Operating Expenses are based on the funds' most recently
completed fiscal year, absent any expense reimbursements or fee waivers. The
funds' most recent annual report and financial highlights reflect the
operating expenses of the funds and do not include Acquired Fund Fees and
Expenses.
(3)The advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after waivers and excluding Acquired Fund Fees and Expenses, 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. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2009, at the discretion of the advisor. Prior to that time, such
waivers and reimbursements may not be terminated without the approval of the
funds' board of directors.
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------------------
Acquired
Distribution and/or Fund Fees Total Annual
Management Service (12b-1) Other and Fund Operating
CLASS Y Fees Fees Expenses Expenses(1) Expenses(2)
--------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund 0.50% None 0.88% 0.01% 1.39%
California Tax Free
Fund 0.50% None 0.70% 0.01% 1.21%
Colorado Tax Free Fund 0.50% None 1.05% 0.01% 1.56%
Minnesota Tax Free
Fund 0.50% None 0.35% 0.01% 0.86%
Missouri Tax Free Fund 0.50% None 0.35% -- 0.85%
Nebraska Tax Free Fund 0.50% None 0.72% -- 1.22%
Ohio Tax Free Fund 0.50% None 0.64% 0.01% 1.15%
Tax Free Fund 0.50% None 0.28% -- 0.78%
--------------------------------------------------------------------------------------------------------------------
<Caption>
--------------------------------------------------------
Less Fee Net
CLASS Y Waivers(3) Expenses(3)
--------------------------------------------------------
Arizona Tax Free Fund (0.88)% 0.51%
California Tax Free
Fund (0.70)% 0.51%
Colorado Tax Free Fund (1.05)% 0.51%
Minnesota Tax Free
Fund (0.15)% 0.71%
Missouri Tax Free Fund (0.15)% 0.70%
Nebraska Tax Free Fund (0.72)% 0.50%
Ohio Tax Free Fund (0.64)% 0.51%
Tax Free Fund (0.08)% 0.70%
--------------------------------------------------------
</Table>
(1)In addition to the funds' total annual operating expenses that the funds bear
directly, the funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the funds invest.
(2)Total Annual Fund Operating Expenses are based on the funds' most recently
completed fiscal year, absent any expense reimbursements or fee waivers. The
funds' most recent annual report and financial highlights reflect the
operating expenses of the funds and do not include Acquired Fund Fees and
Expenses.
(3)The advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after waivers and excluding Acquired Fund Fees and Expenses, 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. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2009, at the discretion of the advisor. Prior to that time, such
waivers and reimbursements may not be terminated without the approval of the
funds' board of directors.
13
Prospectus - First American Tax Free Income Funds
Fund Summaries
Fees and Expenses continued
EXAMPLES These examples are intended to help you compare the cost of investing
in each 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 each fund's operating expenses remain the same.
Although your actual costs and returns may differ, based on these assumptions
your costs would be:
<Table>
<Caption>
CLASS A One Year Three Years Five Years Ten Years
-----------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund $ 499 $ 838 $ 1,199 $ 2,215
-----------------------------------------------------------------------------------------------------------------------
California Tax Free Fund $490 $794 $1,120 $2,041
-----------------------------------------------------------------------------------------------------------------------
Colorado Tax Free Fund $499 $872 $1,269 $2,378
-----------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund $509 $739 $ 987 $1,698
-----------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund $518 $746 $ 992 $1,695
-----------------------------------------------------------------------------------------------------------------------
Nebraska Tax Free Fund $498 $802 $1,128 $2,049
-----------------------------------------------------------------------------------------------------------------------
Ohio Tax Free Fund $499 $789 $1,100 $1,980
-----------------------------------------------------------------------------------------------------------------------
Tax Free Fund $498 $710 $ 939 $1,596
</Table>
<Table>
<Caption>
CLASS C (ASSUMING REDEMPTION AT END OF EACH PERIOD) One Year Three Years Five Years Ten Years
-----------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund $ 218 $ 555 $ 1,017 $ 2,299
-----------------------------------------------------------------------------------------------------------------------
California Tax Free Fund $218 $517 $ 941 $2,123
-----------------------------------------------------------------------------------------------------------------------
Colorado Tax Free Fund $218 $590 $1,089 $2,462
-----------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund $238 $462 $ 810 $1,789
-----------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund $237 $459 $ 804 $1,778
-----------------------------------------------------------------------------------------------------------------------
Nebraska Tax Free Fund $217 $518 $ 944 $2,132
-----------------------------------------------------------------------------------------------------------------------
Ohio Tax Free Fund $218 $502 $ 911 $2,053
-----------------------------------------------------------------------------------------------------------------------
Tax Free Fund $237 $445 $ 774 $1,706
</Table>
<Table>
<Caption>
CLASS C (ASSUMING NO REDEMPTION AT END OF EACH PERIOD) One Year Three Years Five Years Ten Years
-----------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund $ 118 $ 555 $ 1,017 $ 2,299
-----------------------------------------------------------------------------------------------------------------------
California Tax Free Fund $118 $517 $ 941 $2,123
-----------------------------------------------------------------------------------------------------------------------
Colorado Tax Free Fund $118 $590 $1,089 $2,462
-----------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund $138 $462 $ 810 $1,789
-----------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund $137 $459 $ 804 $1,778
-----------------------------------------------------------------------------------------------------------------------
Nebraska Tax Free Fund $117 $518 $ 944 $2,132
-----------------------------------------------------------------------------------------------------------------------
Ohio Tax Free Fund $118 $502 $ 911 $2,053
-----------------------------------------------------------------------------------------------------------------------
Tax Free Fund $137 $445 $ 774 $1,706
</Table>
<Table>
<Caption>
CLASS Y One Year Three Years Five Years Ten Years
-----------------------------------------------------------------------------------------------------------------------
Arizona Tax Free Fund $ 52 $ 353 $ 676 $ 1,592
-----------------------------------------------------------------------------------------------------------------------
California Tax Free Fund $52 $315 $598 $1,404
-----------------------------------------------------------------------------------------------------------------------
Colorado Tax Free Fund $52 $389 $750 $1,767
-----------------------------------------------------------------------------------------------------------------------
Minnesota Tax Free Fund $73 $259 $462 $1,047
-----------------------------------------------------------------------------------------------------------------------
Missouri Tax Free Fund $72 $256 $457 $1,035
-----------------------------------------------------------------------------------------------------------------------
Nebraska Tax Free Fund $51 $316 $601 $1,413
-----------------------------------------------------------------------------------------------------------------------
Ohio Tax Free Fund $52 $302 $571 $1,340
-----------------------------------------------------------------------------------------------------------------------
Tax Free Fund $72 $241 $425 $ 959
</Table>
14
Prospectus - First American Tax Free Income Funds
More About the Funds
Investment Strategies 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.
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.
15
Prospectus - First American Tax Free 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, as permitted by the Securities and Exchange
Commission (SEC).
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.
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. 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 group retirement and employee benefit plans and to
certain persons who are charged fees for advisory, investment, consulting or
similar services by a financial intermediary or other service provider. Such
persons may include, but are not limited to, individuals, corporations, and
endowments.
Class Share Overview
<Table>
<Caption>
Front-End Contingent
Sales Charge Deferred Sales Annual 12b-1 Fees
(FESC) Charge (CDSC) (as a % of net assets)
-------------------------------------------------------------------------
Class A 4.25%(1) 0.00%(2) 0.25%
Class C(3) None 1.00%(4) 0.65%
Class Y None None None
-------------------------------------------------------------------------
</Table>
(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.
Between 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 (for funds that offered such share class prior to July 1,
2008), and Class C shares (not including First American money market funds) to
equal or exceed $1 million dollars, 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.
DETERMINING YOUR SHARE PRICE
Because the current prospectus and Statement of Additional Information are
available on First American Funds' website free of charge, we do not disclose
the following share class information separately on the website.
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.
<Table>
<Caption>
Sales Charge
----------------------------
As a %
As a % of Net
of Amount
Offering Invest-
PURCHASE AMOUNT Price ed
--------------------------------------------------------
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%
</Table>
16
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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 (for funds that offered
such share class prior to July 1, 2008), 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 (for funds that offered such share class prior to
July 1, 2008), 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 make an aggregate investment of $50,000 or
more over a 13-month period in Class A or Class C shares of one or more First
American Funds, other than 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.
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.
- persons who hold shares of a First American money market fund pursuant to an
arrangement, which has subsequently terminated, under which the money market
fund had served as a cash investment option for another mutual fund family,
but only with respect to exchanges of those shares (including shares
representing reinvested dividends) for shares of other First American funds.
- persons who held shares of a tax free income fund of another mutual fund
family, where such other fund was subsequently liquidated or merged into
another mutual fund, or where the liquidation or merger is pending, provided
the purchase of Class A shares is made prior to June 30, 2009.
- group retirement and employee benefit plans.
17
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
You must notify the funds or your financial intermediary if you are eligible to
purchase Class A shares without a sales charge.
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."
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."
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. The 12b-1 fees
paid by the funds are designated as distribution fees and/or shareholder
servicing fees, as described here.
<Table>
<Caption>
Annual 12b-1 Fees
-------------------------
Shareholder
Distribution Servicing
Fee Fee
--------------------------------------------------------
Class A(1) None 0.25%
Class C 0.40% 0.25%
Class Y None None
--------------------------------------------------------
</Table>
(1)The advisor has agreed to reimburse an amount of Class A share 12b-1 fees
equal to 0.10%, 0.10%, and 0.20% of average daily net assets for California
Tax Free Fund, Minnesota Tax Free Fund, and Tax Free Fund, respectively,
through October 31, 2009.
Because 12b-1 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."
18
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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:
<Table>
<Caption>
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%
</Table>
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 to selected intermediaries 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
the intermediary or its representatives to recommend or offer shares of the
funds to you. The intermediary may elevate the prominence or profile of the
funds within the intermediary'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 intermediary's organization. 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 First American Fund shares that the intermediary sells or may sell; the
value of the assets invested in the First American Funds by the intermediary's
customers; 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. Such payments are generally asset based but also may
include the payment of a lump sum for services provided. In addition, the
advisor and/or the distributor may make payments to reimburse selected
intermediaries for items such as ticket charges (i.e., fees that an intermediary
charges its representatives for effecting transactions in fund shares),
operational charges, literature printing and/or distribution costs, and
networking fees.
The advisor and/or distributor may make other payments or allow other
promotional incentives to financial intermediaries to the extent permitted by
SEC and FINRA rules and by other applicable laws and regulations.
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 only will not be accepted. We may also
ask for other identifying documents or information.
19
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.
<Table>
<Caption>
Minimum Minimum
Initial Additional
Account Types Investment Investment
--------------------------------------------------------
Uniform Gift to Minors Act
(UGMA)/Uniform Transfers to
Minors Act (UTMA) accounts $ 500 $ 25
All other accounts $1,000 $100
</Table>
The funds reserve the right to waive or lower purchase minimums under certain
circumstances and to reject any purchase order. As of January 1, 2009, the
minimum initial investment will increase to $2,500 for all accounts and
additional investments will be allowed for as little as $100 for all accounts.
By Phone. You can purchase shares by calling your financial intermediary, if it
has a sales agreement with the funds' distributor. Once the initial minimum
investment has been made, you can also place purchase orders in amounts equal to
or greater than the minimum additional investment amount for your account type
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, or public offering price as applicable based on your share
class, 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:
<Table>
<Caption>
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
</Table>
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 in amounts less than $10,000, third-party
checks, Treasury checks, credit card checks, traveler's checks, starter
checks, and credit cards will not be accepted. We are unable to accept post
dated checks, post dated on time bill pay checks, or any conditional order or
payment.
- If a check or ACH transaction does not clear your bank, the funds reserve the
right to cancel the purchase, and you may be charged a fee of $25 per check or
transaction. You could be liable for any losses or fees incurred by the fund
as a result of your check or ACH transaction 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 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 and Class C Shares
When you redeem shares, the proceeds are normally sent on the next business day,
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 you have previously supplied your bank account
information to the fund) or sent to you by check. The funds charge a $15 fee for
wire redemptions, but have the right to waive this fee for shares redeemed
through certain financial intermediaries and by certain individuals. 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. Credit
is usually available within 2-3 business days. The First American Funds reserve
the right to limit telephone redemptions to $50,000 per account per day.
20
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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:
<Table>
<Caption>
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
</Table>
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
After you have established your account, signatures on a written request must be
guaranteed if:
- you would like redemption proceeds to be paid to any person, address, or bank
account other than that on 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 in excess of $50,000.
- bank information related to an automatic investment plan, telephone purchase
or telephone redemption is changed.
In addition to the situations described above, the funds reserve the right to
require a signature guarantee in other instances based on the circumstances of a
particular situation.
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 pre-printed savings account deposit slip. 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.
You may set up systematic withdrawals when you complete a new account form or by
calling 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 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.
21
Prospectus - First American Tax Free Income Funds
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 one 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.
Systematic Transactions. You may add to your investment, or redeem a specific
dollar amount from your account, on a regular, automatic basis through a
systematic investment or withdrawal plan. You may also move from one First
American Fund to another First American Fund of the same class on a regular
basis through automatic monthly exchanges. You may apply for participation in
these programs through 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.
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. The fund does not calculate its NAV on
national holidays, or any other days, on which the NYSE is closed for trading.
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 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.
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
22
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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.
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 generally seek to apply their short-term trading
policies and procedures to these omnibus account arrangements, and monitor
trading activity at the omnibus account level to attempt to identify disruptive
trades. Under agreements that the funds (or the funds' distributor) have entered
into with intermediaries, the funds may request transaction information from
intermediaries at any time in order to determine whether there has been short-
term trading by the intermediaries' customers. The funds will request that the
intermediary provide additional 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 intermediary take appropriate action to curtail the activity. If the
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. An intermediary may apply
its own short-term trading policies and procedures, which may be more or less
restrictive than the funds' policies and procedures. If you purchase or sell
fund shares through an intermediary, you should contact them to determine
whether they impose different requirements or restrictions.
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.
23
Prospectus - First American Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
Once a telephone transaction has been placed, it cannot be canceled or modified.
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
The funds reserve the right to liquidate or assess a low balance fee to any
account holding a balance that is less than the account balance minimum of $500
for any reason, including market fluctuation.
Annually, on or about the second Wednesday of August, the funds will assess a
$15 low balance fee to certain retirement accounts, education savings plans, and
UGMA/UTMA accounts that have balances under the account balance minimum. At the
same time, other accounts with balances under the account balance minimum will
be liquidated, with proceeds being mailed to the address of record. Shareholders
will receive a communication reminding them of this scheduled action in their
second quarter account statements, thereby providing time to ensure that
balances are at or above the account balance minimum prior to the assessment of
the low balance fee or liquidation of low balance accounts.
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, if you redeem more than $250,000 of a fund's assets within a 30-
day period, each fund reserves the right to pay part or all of the proceeds from
a redemption request in a proportionate share of securities from the fund's
portfolio instead of cash. The advisor 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.
24
Prospectus - First American Tax Free 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 report of independent registered public accounting
firm.
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 generally are mailed following each purchase or sale of fund
shares, but some transactions, 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 you place
a purchase order or 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.
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.
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.
State Taxes on Distributions
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
25
Prospectus - First American Tax Free Income Funds
Policies and Services
Managing Your Investment continued
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.
More information about tax considerations that may affect the funds and their
shareholders appears in the funds' SAI.
26
Prospectus - First American Tax Free Income Funds
Additional Information
Management
FAF Advisors, 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 September 30,
2008, FAF Advisors had more than $99 billion in assets under management,
including investment company assets of more than $86 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 year.
Management fee
as a % of average
daily net assets
-----------------------------------------------------
ARIZONA TAX FREE FUND 0.00%
CALIFORNIA TAX FREE FUND 0.00%
COLORADO TAX FREE FUND 0.00%
MINNESOTA TAX FREE FUND 0.35%
MISSOURI TAX FREE FUND 0.35%
NEBRASKA TAX FREE FUND 0.00%
OHIO TAX FREE FUND 0.00%
TAX FREE FUND 0.42%
-----------------------------------------------------
A discussion regarding the basis for the board's approval of the funds'
investment advisory agreement appears in the funds' annual report to
shareholders for the fiscal year ended June 30, 2008.
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 0.25% 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 to
these fees, the funds may reimburse FAF Advisors for any out-of-pocket expenses
incurred in providing administration services.
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 on a
per shareholder account basis, subject to a minimum per share class fee. In
addition, the funds may reimburse Fund Services for any out-of-pocket expenses
incurred in providing transfer agency services.
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 "Policies and Services -- Purchasing, Redeeming, and
Exchanging Shares -- Additional Payments to Financial Intermediaries."
27
Prospectus - First American Tax Free 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.
Arizona Tax Free Fund. Michael S. Hamilton has served as the primary portfolio
manager for the fund since June 2007 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. Christopher L. Drahn has served as the primary
portfolio manager for the fund since June 2007, and, prior to that, co-managed
the fund since February 2000. Michael L. Welle has co-managed the fund since
June 2007.
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. Michael L. Welle has served as the primary portfolio
manager for the fund since June 2007 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 Christopher L. Drahn has co-managed the fund
since June 2007.
PORTFOLIO MANAGER BIOGRAPHIES
Christopher L. Drahn, CFA, Senior Fixed-Income Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1980.
Michael S. Hamilton, Senior Fixed-Income Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1989.
Michael L. Welle, CFA, Fixed-Income Trader, Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1992.
Douglas J. White, CFA, Head of Tax Exempt Fixed Income, entered the financial
services industry in 1983 and joined FAF Advisors in 1987.
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.
28
Prospectus - First American Tax Free Income 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
<Table>
<Caption>
Fiscal year
ended Fiscal period Fiscal year ended September
June 30, ended 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.79 $10.85 $11.19 $11.42 $11.33 $ 11.41
------ ------ ------ ------ ------ -------
Investment Operations:
Net Investment Income 0.45 0.46 0.33 0.46 0.49 0.46
Realized and Unrealized Gains (Losses) on
Investments (0.33) (0.01) (0.25) (0.07) 0.12 (0.06)
------ ------ ------ ------ ------ -------
Total From Investment Operations 0.12 0.45 0.08 0.39 0.61 0.40
------ ------ ------ ------ ------ -------
Less Distributions:
Dividends (from net investment income) (0.45) (0.45) (0.33) (0.49) (0.47) (0.45)
Distributions (from net realized gains) (0.03) (0.06) (0.09) (0.13) (0.05) (0.03)
------ ------ ------ ------ ------ -------
Total Distributions (0.48) (0.51) (0.42) (0.62) (0.52) (0.48)
------ ------ ------ ------ ------ -------
Net Asset Value, End of Period $10.43 $10.79 $10.85 $11.19 $11.42 $ 11.33
====== ====== ====== ====== ====== =======
Total Return(2) 1.10% 4.12% 0.73% 3.49% 5.50% 3.61%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,705 $8,359 $9,041 $9,547 $9,008 $11,928
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net
Assets 4.20% 4.11% 4.02% 4.14% 4.16% 4.03%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.63% 1.64% 1.47% 1.18% 1.12% 1.09%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.32% 3.22% 3.30% 3.71% 3.79% 3.69%
Portfolio Turnover Rate 30% 25% 47% 20% 21% 37%
----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
29
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Arizona Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period Fiscal year ended September
June 30, ended 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.78 $10.84 $11.18 $11.41 $11.31 $11.40
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.41 0.41 0.30 0.42 0.43 0.42
Realized and Unrealized Gains (Losses) on
Investments (0.34) (0.01) (0.25) (0.08) 0.14 (0.08)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.07 0.40 0.05 0.34 0.57 0.34
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.41) (0.40) (0.30) (0.44) (0.42) (0.40)
Distributions (from net realized gains) (0.03) (0.06) (0.09) (0.13) (0.05) (0.03)
------ ------ ------ ------ ------ ------
Total Distributions (0.44) (0.46) (0.39) (0.57) (0.47) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.41 $10.78 $10.84 $11.18 $11.41 $11.31
====== ====== ====== ====== ====== ======
Total Return(2) 0.61% 3.71% 0.42% 3.08% 5.17% 3.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,376 $1,541 $1,358 $1,628 $1,588 $1,857
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to Average Net
Assets 3.79% 3.70% 3.62% 3.74% 3.76% 3.63%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.03% 2.12% 2.22% 1.93% 1.87% 1.84%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.91% 2.73% 2.55% 2.96% 3.04% 2.94%
Portfolio Turnover Rate 30% 25% 47% 20% 21% 37%
---------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period Fiscal year ended September
June 30, ended 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.80 $ 10.85 $ 11.19 $ 11.43 $11.33 $11.41
------- ------- ------- ------- ------ ------
Investment Operations:
Net Investment Income 0.47 0.48 0.35 0.50 0.50 0.48
Realized and Unrealized Gains (Losses) on
Investments (0.33) -- (0.25) (0.09) 0.15 (0.06)
------- ------- ------- ------- ------ ------
Total From Investment Operations 0.14 0.48 0.10 0.41 0.65 0.42
------- ------- ------- ------- ------ ------
Less Distributions:
Dividends (from net investment income) (0.48) (0.47) (0.35) (0.52) (0.50) (0.47)
Distributions (from net realized gains) (0.03) (0.06) (0.09) (0.13) (0.05) (0.03)
------- ------- ------- ------- ------ ------
Total Distributions (0.51) (0.53) (0.44) (0.65) (0.55) (0.50)
------- ------- ------- ------- ------ ------
Net Asset Value, End of Period $ 10.43 $ 10.80 $ 10.85 $ 11.19 $11.43 $11.33
======= ======= ======= ======= ====== ======
Total Return(2) 1.26% 4.48% 0.92% 3.65% 5.85% 3.86%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $17,522 $19,329 $15,614 $14,035 $9,520 $9,244
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to Average Net
Assets 4.45% 4.36% 4.27% 4.39% 4.42% 4.28%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.38% 1.39% 1.22% 0.93% 0.87% 0.84%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.57% 3.47% 3.55% 3.96% 4.05% 3.94%
Portfolio Turnover Rate 30% 25% 47% 20% 21% 37%
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
30
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
California Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.98 $ 10.96 $ 11.24 $ 11.40 $11.40 $ 11.63
------- ------- ------- ------- ------ -------
Investment Operations:
Net Investment Income 0.46 0.45 0.33 0.44 0.46 0.47
Realized and Unrealized Gains
(Losses) on Investments (0.23) 0.06 (0.26) (0.05) 0.08 (0.16)
------- ------- ------- ------- ------ -------
Total From Investment Operations 0.23 0.51 0.07 0.39 0.54 0.31
------- ------- ------- ------- ------ -------
Less Distributions:
Dividends (from net investment
income) (0.46) (0.45) (0.33) (0.44) (0.46) (0.47)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------- ------- ------- ------- ------ -------
Total Distributions (0.50) (0.49) (0.35) (0.55) (0.54) (0.54)
------- ------- ------- ------- ------ -------
Net Asset Value, End of Period $ 10.71 $ 10.98 $ 10.96 $ 11.24 $11.40 $ 11.40
======= ======= ======= ======= ====== =======
Total Return(2) 2.11% 4.62% 0.63% 3.50% 4.93% 2.85%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $12,076 $11,375 $10,783 $11,888 $9,513 $11,143
Ratio of Expenses to Average Net
Assets 0.67% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average
Net Assets 4.19% 4.00% 3.99% 3.88% 4.03% 4.16%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.46% 1.46% 1.34% 1.15% 1.09% 1.08%
Ratio of Net Investment Income to
Average
Net Assets (excluding waivers) 3.40% 3.29% 3.40% 3.48% 3.69% 3.83%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.99 $10.97 $11.25 $11.41 $11.41 $11.64
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.40 0.41 0.30 0.40 0.41 0.43
Realized and Unrealized Gains
(Losses) on Investments (0.22) 0.05 (0.26) (0.05) 0.09 (0.16)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.18 0.46 0.04 0.35 0.50 0.27
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.41) (0.40) (0.30) (0.40) (0.42) (0.43)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------ ------ ------ ------ ------ ------
Total Distributions (0.45) (0.44) (0.32) (0.51) (0.50) (0.50)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.72 $10.99 $10.97 $11.25 $11.41 $11.41
====== ====== ====== ====== ====== ======
Total Return(2) 1.61% 4.17% 0.33% 3.11% 4.52% 2.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,480 $1,507 $3,592 $3,068 $1,294 $1,101
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets 3.68% 3.60% 3.60% 3.47% 3.65% 3.75%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.85% 1.98% 2.09% 1.90% 1.84% 1.83%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 2.98% 2.77% 2.66% 2.72% 2.96% 3.07%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
31
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
California Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.98 $ 10.97 $ 11.25 $ 11.40 $ 11.40 $ 11.63
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.48 0.47 0.35 0.47 0.48 0.49
Realized and Unrealized Gains
(Losses) on Investments (0.23) 0.05 (0.26) (0.04) 0.09 (0.15)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.25 0.52 0.09 0.43 0.57 0.34
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment
income) (0.48) (0.47) (0.35) (0.47) (0.49) (0.50)
Distributions (from net realized
gains) (0.04) (0.04) (0.02) (0.11) (0.08) (0.07)
------- ------- ------- ------- ------- -------
Total Distributions (0.52) (0.51) (0.37) (0.58) (0.57) (0.57)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.71 $ 10.98 $ 10.97 $ 11.25 $ 11.40 $ 11.40
======= ======= ======= ======= ======= =======
Total Return(2) 2.28% 4.78% 0.82% 3.85% 5.19% 3.11%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $30,485 $24,835 $21,767 $19,556 $16,047 $15,243
Ratio of Expenses to Average Net
Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.36% 4.25% 4.24% 4.12% 4.29% 4.40%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.20% 1.21% 1.09% 0.90% 0.84% 0.83%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.66% 3.54% 3.65% 3.72% 3.95% 4.07%
Portfolio Turnover Rate 45% 36% 24% 14% 16% 20%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
32
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Colorado Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.61 $10.73 $11.30 $11.52 $ 11.57 $ 11.65
------ ------ ------ ------ ------- -------
Investment Operations:
Net Investment Income 0.48 0.46 0.35 0.49 0.51 0.50
Realized and Unrealized Gains (Losses)
on Investments (0.33) (0.02) (0.26) (0.11) 0.02 (0.10)
------ ------ ------ ------ ------- -------
Total From Investment Operations 0.15 0.44 0.09 0.38 0.53 0.40
------ ------ ------ ------ ------- -------
Less Distributions:
Dividends (from net investment income) (0.45) (0.48) (0.34) (0.51) (0.50) (0.48)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------ ------ ------ ------ ------- -------
Total Distributions (0.48) (0.56) (0.66) (0.60) (0.58) (0.48)
------ ------ ------ ------ ------- -------
Net Asset Value, End of Period $10.28 $10.61 $10.73 $11.30 $ 11.52 $ 11.57
====== ====== ====== ====== ======= =======
Total Return(2) 1.52% 4.13% 0.77% 3.36% 4.71% 3.53%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,815 $8,788 $8,507 $8,362 $10,598 $13,843
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets 4.40% 4.27% 4.30% 4.23% 4.25% 4.23%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.80% 1.75% 1.52% 1.18% 1.09% 1.07%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.35% 3.27% 3.53% 3.80% 3.91% 3.91%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.59 $10.71 $11.28 $11.50 $11.56 $11.63
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.42 0.42 0.32 0.43 0.44 0.44
Realized and Unrealized Gains
(Losses) on Investments (0.31) (0.02) (0.27) (0.10) 0.03 (0.08)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.11 0.40 0.05 0.33 0.47 0.36
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.41) (0.44) (0.30) (0.46) (0.45) (0.43)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------ ------ ------ ------ ------ ------
Total Distributions (0.44) (0.52) (0.62) (0.55) (0.53) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.26 $10.59 $10.71 $11.28 $11.50 $11.56
====== ====== ====== ====== ====== ======
Total Return(2) 1.12% 3.72% 0.47% 2.95% 4.21% 3.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,859 $2,888 $3,007 $3,423 $3,787 $4,284
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets 3.98% 3.87% 3.90% 3.83% 3.85% 3.83%
Ratio of Expenses to Average Net Assets
(excluding waivers) 2.20% 2.24% 2.27% 1.93% 1.84% 1.82%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 2.93% 2.78% 2.78% 3.05% 3.16% 3.16%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
33
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Colorado Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.63 $ 10.75 $ 11.32 $11.53 $11.59 $11.67
------- ------- ------- ------ ------ ------
Investment Operations:
Net Investment Income 0.49 0.50 0.37 0.51 0.52 0.51
Realized and Unrealized Gains
(Losses) on Investments (0.32) (0.03) (0.26) (0.09) 0.03 (0.09)
------- ------- ------- ------ ------ ------
Total From Investment Operations 0.17 0.47 0.11 0.42 0.55 0.42
------- ------- ------- ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.48) (0.51) (0.36) (0.54) (0.53) (0.50)
Distributions (from net realized
gains) (0.03) (0.08) (0.32) (0.09) (0.08) --
------- ------- ------- ------ ------ ------
Total Distributions (0.51) (0.59) (0.68) (0.63) (0.61) (0.50)
------- ------- ------- ------ ------ ------
Net Asset Value, End of Period $ 10.29 $ 10.63 $ 10.75 $11.32 $11.53 $11.59
======= ======= ======= ====== ====== ======
Total Return(2) 1.67% 4.39% 0.96% 3.70% 4.87% 3.78%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $15,889 $13,477 $10,181 $8,363 $9,439 $9,516
Ratio of Expenses to Average Net
Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.63% 4.51% 4.58% 4.48% 4.51% 4.49%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.55% 1.50% 1.27% 0.93% 0.84% 0.82%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.58% 3.51% 3.81% 4.05% 4.17% 4.17%
Portfolio Turnover Rate 49% 47% 35% 30% 12% 14%
--------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
34
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Minnesota Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of
Period $ 10.93 $ 10.97 $ 11.21 $ 11.23 $ 11.34 $ 11.39
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.44 0.46 0.35 0.45 0.44 0.48
Realized and Unrealized Gains
(Losses) on Investments (0.38) (0.02) (0.21) 0.03 (0.01) (0.05)
-------- -------- -------- -------- -------- --------
Total From Investment
Operations 0.06 0.44 0.14 0.48 0.43 0.43
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income) (0.45) (0.45) (0.35) (0.45) (0.45) (0.45)
Distributions (from net
realized gains) (0.06) (0.03) (0.03) (0.05) (0.09) (0.03)
-------- -------- -------- -------- -------- --------
Total Distributions (0.51) (0.48) (0.38) (0.50) (0.54) (0.48)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.48 $ 10.93 $ 10.97 $ 11.21 $ 11.23 $ 11.34
======== ======== ======== ======== ======== ========
Total Return(2) 0.54% 4.05% 1.28% 4.42% 3.94% 3.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $102,089 $106,732 $101,142 $106,783 $114,981 $125,916
Ratio of Expenses to Average Net
Assets 0.87% 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.14% 4.10% 4.15% 4.04% 3.87% 4.25%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.10% 1.10% 1.10% 1.06% 1.05% 1.06%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.91% 3.95% 4.00% 3.93% 3.77% 4.14%
Portfolio Turnover Rate 37% 20% 11% 16% 25% 23%
-----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
35
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Minnesota Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.89 $ 10.93 $ 11.17 $11.19 $ 11.31 $ 11.36
------- ------- ------- ------ ------- -------
Investment Operations:
Net Investment Income 0.40 0.42 0.31 0.41 0.39 0.43
Realized and Unrealized Gains (Losses)
on Investments (0.39) (0.02) (0.20) 0.03 (0.01) (0.04)
------- ------- ------- ------ ------- -------
Total From Investment Operations 0.01 0.40 0.11 0.44 0.38 0.39
------- ------- ------- ------ ------- -------
Less Distributions:
Dividends (from net investment income) (0.40) (0.41) (0.32) (0.41) (0.41) (0.41)
Distributions (from net realized
gains) (0.06) (0.03) (0.03) (0.05) (0.09) (0.03)
------- ------- ------- ------ ------- -------
Total Distributions (0.46) (0.44) (0.35) (0.46) (0.50) (0.44)
------- ------- ------- ------ ------- -------
Net Asset Value, End of Period $ 10.44 $ 10.89 $ 10.93 $11.17 $ 11.19 $ 11.31
======= ======= ======= ====== ======= =======
Total Return(2) 0.06% 3.65% 0.98% 4.02% 3.45% 3.51%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $20,061 $14,221 $10,359 $9,841 $10,387 $11,951
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 3.63% 3.69% 3.75% 3.64% 3.47% 3.85%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.50% 1.58% 1.85% 1.81% 1.80% 1.81%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.48% 3.46% 3.25% 3.18% 3.02% 3.39%
Portfolio Turnover Rate 37% 20% 11% 16% 25% 23%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.92 $ 10.96 $ 11.20 $ 11.22 $ 11.33 $ 11.38
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.46 0.48 0.36 0.48 0.47 0.51
Realized and Unrealized Gains (Losses)
on Investments (0.38) (0.01) (0.20) 0.03 (0.01) (0.05)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.08 0.47 0.16 0.51 0.46 0.46
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.47) (0.48) (0.37) (0.48) (0.48) (0.48)
Distributions (from net realized
gains) (0.06) (0.03) (0.03) (0.05) (0.09) (0.03)
------- ------- ------- ------- ------- -------
Total Distributions (0.53) (0.51) (0.40) (0.53) (0.57) (0.51)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.47 $ 10.92 $ 10.96 $ 11.20 $ 11.22 $ 11.33
======= ======= ======= ======= ======= =======
Total Return(2) 0.71% 4.31% 1.47% 4.69% 4.20% 4.16%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $44,993 $56,181 $48,760 $46,471 $42,900 $47,858
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 4.32% 4.35% 4.40% 4.29% 4.12% 4.50%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.85% 0.85% 0.85% 0.81% 0.80% 0.81%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 4.17% 4.20% 4.25% 4.18% 4.02% 4.39%
Portfolio Turnover Rate 37% 20% 11% 16% 25% 23%
-----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
36
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Missouri Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.72 $ 11.76 $ 12.14 $ 12.32 $ 12.37 $ 12.47
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.46 0.45 0.34 0.45 0.45 0.45
Realized and Unrealized gains (Losses)
on Investments (0.29) 0.05 (0.29) (0.12) (0.02) (0.04)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.17 0.50 0.05 0.33 0.43 0.41
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.46) (0.45) (0.34) (0.45) (0.45) (0.45)
Distributions (from net realized
gains) (0.03) (0.09) (0.09) (0.06) (0.03) (0.06)
------- ------- ------- ------- ------- -------
Total Distributions (0.49) (0.54) (0.43) (0.51) (0.48) (0.51)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 11.40 $ 11.72 $ 11.76 $ 12.14 $ 12.32 $ 12.37
======= ======= ======= ======= ======= =======
Total Return(2) 1.44% 4.23% 0.38% 2.74% 3.60% 3.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $23,135 $24,945 $26,972 $30,188 $27,114 $28,141
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 3.92% 3.78% 3.74% 3.65% 3.68% 3.69%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.10% 1.10% 1.09% 1.06% 1.05% 1.06%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.77% 3.63% 3.60% 3.54% 3.58% 3.58%
Portfolio Turnover Rate 20% 33% 20% 19% 15% 20%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $11.69 $11.73 $12.12 $12.29 $12.35 $12.46
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.41 0.41 0.30 0.40 0.40 0.40
Realized and Unrealized Gains (Losses)
on Investments (0.30) 0.04 (0.30) (0.11) (0.03) (0.04)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.11 0.45 0.00 0.29 0.37 0.36
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.41) (0.40) (0.30) (0.40) (0.40) (0.41)
Distributions (from net realized gains) (0.03) (0.09) (0.09) (0.06) (0.03) (0.06)
------ ------ ------ ------ ------ ------
Total Distributions (0.44) (0.49) (0.39) (0.46) (0.43) (0.47)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $11.36 $11.69 $11.73 $12.12 $12.29 $12.35
====== ====== ====== ====== ====== ======
Total Return(2) 0.95% 3.84% 0.00% 2.42% 3.11% 3.05%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 406 $ 518 $ 214 $ 190 $ 218 $ 279
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 3.53% 3.35% 3.34% 3.25% 3.28% 3.30%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.50% 1.57% 1.84% 1.81% 1.80% 1.81%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.38% 3.13% 2.85% 2.79% 2.83% 2.84%
Portfolio Turnover Rate 20% 33% 20% 19% 15% 20%
----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
37
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Missouri Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.73 $ 11.76 $ 12.15 $ 12.32 $ 12.38 $ 12.48
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.48 0.48 0.36 0.48 0.48 0.49
Realized and Unrealized Gains (Losses) on
Investments (0.30) 0.06 (0.30) (0.11) (0.03) (0.05)
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.18 0.54 0.06 0.37 0.45 0.44
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.48) (0.48) (0.36) (0.48) (0.48) (0.48)
Distributions (from net realized gains) (0.03) (0.09) (0.09) (0.06) (0.03) (0.06)
-------- -------- -------- -------- -------- --------
Total Distributions (0.51) (0.57) (0.45) (0.54) (0.51) (0.54)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 11.40 $ 11.73 $ 11.76 $ 12.15 $ 12.32 $ 12.38
======== ======== ======== ======== ======== ========
Total Return(2) 1.60% 4.58% 0.49% 3.08% 3.77% 3.71%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $137,746 $130,644 $138,394 $151,710 $152,676 $168,094
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 4.17% 4.03% 3.99% 3.90% 3.93% 3.94%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.85% 0.85% 0.84% 0.81% 0.80% 0.81%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 4.02% 3.88% 3.85% 3.79% 3.83% 3.83%
Portfolio Turnover Rate 20% 33% 20% 19% 15% 20%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
38
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Nebraska Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.30 $10.33 $10.58 $10.66 $10.66 $10.70
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.42 0.42 0.31 0.39 0.41 0.41
Realized and Unrealized Gains (Losses)
on Investments (0.20) 0.02 (0.24) (0.05) 0.03 (0.04)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.22 0.44 0.07 0.34 0.44 0.37
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.41) (0.42) (0.30) (0.42) (0.40) (0.40)
Distributions (from net realized gains) (0.05) (0.05) (0.02) -- (0.04) (0.01)
------ ------ ------ ------ ------ ------
Total Distributions (0.46) (0.47) (0.32) (0.42) (0.44) (0.41)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.06 $10.30 $10.33 $10.58 $10.66 $10.66
====== ====== ====== ====== ====== ======
Total Return(2) 2.19% 4.24% 0.65% 3.20% 4.18% 3.57%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,689 $7,091 $6,910 $7,136 $4,925 $4,869
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average
Net Assets 4.06% 3.97% 3.89% 3.78% 3.82% 3.87%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.47% 1.44% 1.30% 1.12% 1.08% 1.07%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.34% 3.28% 3.34% 3.41% 3.49% 3.55%
Portfolio Turnover Rate 22% 39% 35% 21% 17% 15%
----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.23 $10.26 $10.50 $10.58 $10.58 $10.63
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.38 0.37 0.27 0.35 0.35 0.36
Realized and Unrealized Gains (Losses)
on Investments (0.20) 0.02 (0.22) (0.06) 0.04 (0.04)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.18 0.39 0.05 0.29 0.39 0.32
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.37) (0.37) (0.27) (0.37) (0.35) (0.36)
Distributions (from net realized gains) (0.05) (0.05) (0.02) -- (0.04) (0.01)
------ ------ ------ ------ ------ ------
Total Distributions (0.42) (0.42) (0.29) (0.37) (0.39) (0.37)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.99 $10.23 $10.26 $10.50 $10.58 $10.58
====== ====== ====== ====== ====== ======
Total Return(2) 1.81% 3.86% 0.46% 2.81% 3.80% 3.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $1,798 $1,559 $1,487 $1,565 $1,861 $1,657
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to Average
Net Assets 3.65% 3.56% 3.49% 3.38% 3.42% 3.46%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.87% 1.92% 2.05% 1.87% 1.83% 1.82%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 2.93% 2.79% 2.59% 2.66% 2.74% 2.79%
Portfolio Turnover Rate 22% 39% 35% 21% 17% 15%
----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
39
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Nebraska Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.30 $ 10.33 $ 10.58 $ 10.66 $ 10.65 $ 10.69
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.44 0.44 0.32 0.43 0.43 0.43
Realized and Unrealized Gains (Losses)
on Investments (0.19) 0.02 (0.23) (0.07) 0.04 (0.03)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.25 0.46 0.09 0.36 0.47 0.40
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.44) (0.44) (0.32) (0.44) (0.42) (0.43)
Distributions (from net realized
gains) (0.05) (0.05) (0.02) -- (0.04) (0.01)
------- ------- ------- ------- ------- -------
Total Distributions (0.49) (0.49) (0.34) (0.44) (0.46) (0.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.06 $ 10.30 $ 10.33 $ 10.58 $ 10.66 $ 10.65
======= ======= ======= ======= ======= =======
Total Return(2) 2.45% 4.51% 0.85% 3.45% 4.54% 3.82%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $29,533 $32,502 $31,347 $32,418 $29,722 $28,120
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.31% 4.22% 4.14% 4.03% 4.07% 4.11%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.22% 1.19% 1.05% 0.87% 0.83% 0.82%
Ratio of Net Investment Income to
Average Net Assets (excluding waivers) 3.59% 3.53% 3.59% 3.66% 3.74% 3.79%
Portfolio Turnover Rate 22% 39% 35% 21% 17% 15%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
Ohio Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.20 $10.17 $10.42 $10.52 $10.54 $10.58
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.39 0.38 0.29 0.36 0.36 0.36
Realized and Unrealized Gains (Losses) on
Investments (0.15) 0.05 (0.25) (0.06) 0.07 (0.03)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.24 0.43 0.04 0.30 0.43 0.33
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.39) (0.38) (0.28) (0.36) (0.35) (0.37)
Distributions (from net realized gains) (0.03) (0.02) (0.01) (0.04) (0.10) --
------ ------ ------ ------ ------ ------
Total Distributions (0.42) (0.40) (0.29) (0.40) (0.45) (0.37)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.02 $10.20 $10.17 $10.42 $10.52 $10.54
====== ====== ====== ====== ====== ======
Total Return(2) 2.38% 4.28% 0.40% 2.86% 4.16% 3.22%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 635 $ 808 $ 841 $ 988 $1,200 $ 849
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average
Net Assets 3.81% 3.70% 3.60% 3.41% 3.43% 3.52%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.39% 1.41% 1.28% 1.11% 1.08% 1.09%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.17% 3.04% 3.07% 3.05% 3.10% 3.18%
Portfolio Turnover Rate 12% 33% 11% 13% 19% 22%
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
40
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Ohio Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.07 $10.05 $10.32 $10.41 $10.44 $10.57
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.35 0.33 0.25 0.32 0.29 0.32
Realized and Unrealized Gains (Losses)
on Investments (0.15) 0.05 (0.26) (0.05) 0.09 (0.12)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.20 0.38 (0.01) 0.27 0.38 0.20
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.35) (0.34) (0.25) (0.32) (0.31) (0.33)
Distributions (from net realized gains) (0.03) (0.02) (0.01) (0.04) (0.10) --
------ ------ ------ ------ ------ ------
Total Distributions (0.38) (0.36) (0.26) (0.36) (0.41) (0.33)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.89 $10.07 $10.05 $10.32 $10.41 $10.44
====== ====== ====== ====== ====== ======
Total Return(2) 2.00% 3.81% (0.08)% 2.58% 3.69% 1.95%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 255 $ 187 $ 209 $ 174 $ 120 $ 215
Ratio of Expenses to Average Net Assets 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to Average
Net Assets 3.39% 3.29% 3.22% 3.01% 3.03% 3.08%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.78% 1.90% 2.03% 1.86% 1.83% 1.84%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 2.76% 2.54% 2.34% 2.30% 2.35% 2.39%
Portfolio Turnover Rate 12% 33% 11% 13% 19% 22%
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.19 $ 10.17 $ 10.43 $ 10.53 $ 10.55 $ 10.57
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.41 0.41 0.30 0.38 0.38 0.39
Realized and Unrealized Gains
(Losses) on Investments (0.15) 0.04 (0.25) (0.05) 0.07 (0.02)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.26 0.45 0.05 0.33 0.45 0.37
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment
income) (0.41) (0.41) (0.30) (0.39) (0.37) (0.39)
Distributions (from net realized
gains) (0.03) (0.02) (0.01) (0.04) (0.10) --
------- ------- ------- ------- ------- -------
Total Distributions (0.44) (0.43) (0.31) (0.43) (0.47) (0.39)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.01 $ 10.19 $ 10.17 $ 10.43 $ 10.53 $ 10.55
======= ======= ======= ======= ======= =======
Total Return(2) 2.63% 4.44% 0.49% 3.12% 4.42% 3.65%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $48,510 $42,223 $40,606 $41,104 $39,240 $39,465
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets 4.06% 3.94% 3.85% 3.66% 3.68% 3.78%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.14% 1.16% 1.03% 0.86% 0.82% 0.84%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.42% 3.28% 3.32% 3.30% 3.36% 3.44%
Portfolio Turnover Rate 12% 33% 11% 13% 19% 22%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
41
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.77 $ 10.86 $ 11.10 $ 11.18 $ 11.28 $ 11.44
------- ------- ------- ------- ------- -------
Income From Investment Operations:
Net Investment Income 0.45 0.45 0.35 0.47 0.47 0.47
Realized and Unrealized Gains
(Losses) on Investments (0.46) -- (0.20) 0.03 0.02 (0.03)
------- ------- ------- ------- ------- -------
Total From Investment Operations (0.01) 0.45 0.15 0.50 0.49 0.44
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment
income) (0.44) (0.45) (0.35) (0.47) (0.48) (0.47)
Distributions (from net realized
gains) (0.06) (0.09) (0.04) (0.11) (0.11) (0.13)
------- ------- ------- ------- ------- -------
Total Distributions (0.50) (0.54) (0.39) (0.58) (0.59) (0.60)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.26 $ 10.77 $ 10.86 $ 11.10 $ 11.18 $ 11.28
======= ======= ======= ======= ======= =======
Total Return(2) (0.05)% 4.16% 1.37% 4.51% 4.45% 4.06%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $35,557 $37,760 $36,519 $38,205 $40,156 $42,942
Ratio of Expenses to Average Net
Assets 0.78% 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.28% 4.08% 4.28% 4.20% 4.18% 4.21%
Ratio of Expenses to Average Net
Assets (excluding waivers) 1.02% 1.03% 1.06% 1.06% 1.05% 1.05%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 4.04% 4.00% 4.17% 4.09% 4.08% 4.11%
Portfolio Turnover Rate 52% 31% 13% 8% 23% 23%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS C SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.72 $10.81 $11.05 $11.13 $11.24 $11.40
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.39 0.40 0.32 0.42 0.43 0.42
Realized and Unrealized Gains
(Losses) on Investments (0.45) 0.01 (0.20) 0.03 -- (0.02)
------ ------ ------ ------ ------ ------
Total From Investment Operations (0.06) 0.41 0.12 0.45 0.43 0.40
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) (0.39) (0.41) (0.32) (0.42) (0.43) (0.43)
Distributions (from net realized
gains) (0.06) (0.09) (0.04) (0.11) (0.11) (0.13)
------ ------ ------ ------ ------ ------
Total Distributions (0.45) (0.50) (0.36) (0.53) (0.54) (0.56)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $10.21 $10.72 $10.81 $11.05 $11.13 $11.24
====== ====== ====== ====== ====== ======
Total Return(2) (0.61)% 3.76% 1.06% 4.13% 3.92% 3.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $3,104 $2,495 $2,210 $2,712 $2,682 $4,880
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 3.72% 3.67% 3.87% 3.80% 3.77% 3.81%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.43% 1.51% 1.81% 1.81% 1.80% 1.80%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 3.64% 3.51% 3.41% 3.34% 3.32% 3.36%
Portfolio Turnover Rate 52% 31% 13% 8% 23% 23%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
42
Prospectus - First American Tax Free Income Funds
Additional Information
Financial Highlights continued
Tax Free Fund (CONTINUED)
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of
Period $ 10.78 $ 10.87 $ 11.11 $ 11.19 $ 11.29 $ 11.45
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.46 0.48 0.37 0.50 0.50 0.50
Realized and Unrealized Gains
(Losses) on Investments (0.46) -- (0.20) 0.02 0.01 (0.03)
-------- -------- -------- -------- -------- --------
Total From Investment
Operations -- 0.48 0.17 0.52 0.51 0.47
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income) (0.45) (0.48) (0.37) (0.49) (0.50) (0.50)
Distributions (from net
realized gains) (0.06) (0.09) (0.04) (0.11) (0.11) (0.13)
-------- -------- -------- -------- -------- --------
Total Distributions (0.51) (0.57) (0.41) (0.60) (0.61) (0.63)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.27 $ 10.78 $ 10.87 $ 11.11 $ 11.19 $ 11.29
======== ======== ======== ======== ======== ========
Total Return(2) 0.04% 4.42% 1.57% 4.77% 4.71% 4.31%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $448,774 $539,360 $455,910 $436,303 $416,651 $460,634
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 4.36% 4.32% 4.53% 4.45% 4.43% 4.46%
Ratio of Expenses to Average Net
Assets (excluding waivers) 0.78% 0.78% 0.81% 0.81% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (excluding
waivers) 4.28% 4.24% 4.42% 4.34% 4.33% 4.36%
Portfolio Turnover Rate 52% 31% 13% 8% 23% 23%
-----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
43
Prospectus - First American Tax Free Income Funds
First American Funds' Privacy Policy
We want you to understand what information we collect and how it's used.
"Nonpublic personal information" is nonpublic information that we obtain while
providing financial products or services to you.
Why we collect your information
We gather nonpublic personal information about you and your accounts so that we
can:
- Know who you are and prevent unauthorized access to your information.
- Design and improve the products we offer.
- Comply with the laws and regulations that govern us.
The types of information we collect
We may collect the following nonpublic personal information about you:
- Information about your identity, such as your name, address, and social
security number
- Information about your transactions with us
- Information you provide on applications, such as your beneficiaries
Confidentiality and security
We operate through service providers. We require our service providers to
restrict access to nonpublic personal information about you to those employees
who need that information in order to provide products or services to you. We
also require them to maintain physical, electronic, and procedural safeguards
that comply with applicable federal standards and regulations to guard your
information.
What information we disclose
We may share all of the nonpublic personal information that we collect about you
with our affiliated providers of financial services, including our family of
funds and their advisor, and with companies that perform marketing services on
our behalf.
We're permitted by law to disclose nonpublic personal information about you to
other third parties in certain circumstances. For example, we may disclose
nonpublic personal information about you to affiliated and nonaffiliated third
parties to assist us in servicing your account (e.g., mailing of fund-related
materials) and to government entities (e.g., IRS for tax purposes).
We'll continue to adhere to the privacy policies and practices described here
even after your account is closed or becomes inactive.
Additional rights and protections
You may have other privacy protections under applicable state laws, such as
California and Vermont. To the extent that these state laws apply, we will
comply with them when we share information about you. This privacy policy does
not apply to your relationship with other financial service providers, such as
broker-dealers. We may amend this privacy notice at any time, and we will inform
you of changes as required by law.
Our pledge applies to products and services offered by:
- First American Funds, Inc.
- First American Investment Funds, Inc.
- First American Strategy Funds, Inc.
- 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.
- American Income Fund, Inc.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
THIS PAGE IS NOT PART OF THE PROSPECTUS
(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.
SEC file number: 811-05309 PROTXFR 10/08
--------------------------------------------------------------------------------
FIRST AMERICAN FUNDS
P.O. Box 1330
Minneapolis, MN 55440-1330
(FIRST AMERICAN FUNDS LOGO)
October 28, 2008
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.
TABLE OF
CONTENTS
<Table>
<Caption>
FUND SUMMARIES
Objectives, Principal Investment Strategies, and Principal
Risks 2
Fund Performance
California Intermediate Tax Free Fund 5
Colorado Intermediate Tax Free Fund 6
Intermediate Tax Free Fund 7
Minnesota Intermediate Tax Free Fund 8
Oregon Intermediate Tax Free Fund 9
Short Tax Free Fund 10
Fees and Expenses 11
MORE ABOUT THE FUNDS
Investment Strategies and Other Investment Matters 13
POLICIES AND SERVICES
Purchasing, Redeeming, and Exchanging Shares 14
Managing Your Investment 22
ADDITIONAL INFORMATION
Management 24
Financial Highlights 26
FOR MORE INFORMATION Back Cover
</Table>
Please find FIRST AMERICAN FUNDS' PRIVACY POLICY inside the back cover of this
Prospectus.
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 (SAI) 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.
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.
1
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Fund Summaries
Objectives, Principal Investment Strategies, and Principal Risks
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.
The Board of Directors of FAIF has approved the merger of California
Intermediate Tax Free Fund into California Tax Free Fund and the merger of
Colorado Intermediate Tax Free Fund into Colorado Tax Free Fund. The mergers
must be approved by the shareholders of California Intermediate Tax Free Fund
and Colorado Intermediate Tax Free Fund, respectively. It is currently
anticipated that proxy materials regarding the mergers will be distributed to
shareholders sometime during the fourth quarter of 2008. Until the mergers are
completed, California Intermediate Tax Free Fund and Colorado Intermediate Tax
Free Fund will remain open for investment by both current and new shareholders.
INVESTMENT OBJECTIVES
The funds have the following investment objectives:
STATE-SPECIFIC FUNDS -- providing current income that is exempt from both
federal income tax and from the income tax of the state specified in the fund's
name, 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.
SHORT TAX FREE FUND -- providing current income that is exempt from federal
income tax to the extent consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, as a fundamental policy, 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; and
- zero coupon municipal securities.
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 20% 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"). 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, other than Short Tax Free Fund, will attempt to maintain the weighted
average maturity of its portfolio securities at 3 to 10 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.
The fund may utilize futures contracts and options on futures contracts in an
attempt to manage market risk, credit risk and yield curve risk, and to manage
the effective maturity or duration of securities in the fund's portfolio. The
fund may not use such instruments 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 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 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 its benchmark or 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.
2
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Fund Summaries
Objectives, Principal Investment Strategies, and Principal Risks 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 Standard & Poor's.
Futures Risk. The use of futures contracts exposes a fund to additional risks
and transaction costs. Risks inherent in the use of futures contracts include:
the risk that securities prices, index prices, or interest rates will not move
in the direction that the advisor anticipates; an imperfect correlation between
the price of the futures contract 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 a
futures contract can result in a loss substantially greater than the fund's
initial investment in that futures contract; and 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 futures contracts and
the advisor's judgment proves incorrect, the fund's performance could be worse
than if it had not used these instruments.
High-Yield Securities Risk. Each fund may invest in high-yield securities.
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. High-yield securities may be more
susceptible to real or perceived adverse economic conditions than investment
grade securities. 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), 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.
Liquidity Risk. Each fund is exposed to liquidity risk because of its
investment in high-yield securities. 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.
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
3
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Fund Summaries
Objectives, Principal Investment Strategies, and Principal Risks continued
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.
4
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
<Table>
<Caption>
5.82% (0.90)% 9.63% 4.47% 8.36% 3.74% 3.53% 2.35% 3.92% 2.92%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.74%
Worst Quarter:
Quarter ended June 30, 2004 (1.96)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07 Date One Year Five Years Ten Year
--------------------------------------------------------------------------------------------------------------------
California Intermediate Tax Free Fund
--------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 8/8/97 0.56% 2.83% 4.11%
--------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) 0.53% 2.75% 4.05%
--------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) 1.67% 2.93% 4.08%
--------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 8/8/97 3.01% 3.43% 4.46%
--------------------------------------------------------------------------------------------------------------------
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
--------------------------------------------------------------------------------------------------------------------
Lipper California Intermediate Municipal Debt Funds
Category Average(3)
(reflects no deduction for sales charges or taxes) 2.65% 2.84% 4.21%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (1.39)%.
(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 in California.
5
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
<Table>
<Caption>
5.44% (1.58)% 8.52% 5.59% 8.70% 4.09% 2.98% 1.91% 3.61% 2.93%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 3.85%
Worst Quarter:
Quarter ended June 30, 2004 (2.16)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07 Date One Year Five Years Ten Years
---------------------------------------------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 4/4/94 0.63% 2.65% 3.94%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) 0.55% 2.57% 3.89%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) 1.86% 2.82% 3.96%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 4/4/94 3.09% 3.27% 4.27%
---------------------------------------------------------------------------------------------------------------------
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
---------------------------------------------------------------------------------------------------------------------
Lipper Other States Intermediate Municipal Debt Funds
Category Average(3)
(reflects no deduction for sales charges or taxes) 2.93% 2.78% 3.79%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (1.18)%.
(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.
6
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
<Table>
<Caption>
5.38% (1.46)% 8.84% 4.83% 9.02% 4.28% 2.95% 2.20% 3.85% 3.12%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.30%
Worst Quarter:
Quarter ended June 30, 2004 (2.10)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07(1) Date One Year Five Years Ten Years
---------------------------------------------------------------------------------------------------------------------
Intermediate Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 12/22/87 0.80% 2.81% 4.03%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) 0.73% 2.76% 3.99%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) 2.03% 2.98% 4.04%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/4/94 3.25% 3.44% 4.35%
---------------------------------------------------------------------------------------------------------------------
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
---------------------------------------------------------------------------------------------------------------------
Lipper Intermediate Municipal Debt Funds Category
Average(3)
(reflects no deduction for sales charges or taxes) 3.05% 3.01% 4.13%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (1.24)%.
(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.
7
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
<Table>
<Caption>
5.34% (1.26)% 8.75% 4.74% 8.23% 3.99% 3.02% 2.14% 3.90% 2.64%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 3.79%
Worst Quarter:
Quarter ended June 30, 2004 (1.77)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07 Date One Year Five Years Ten Years
---------------------------------------------------------------------------------------------------------------------
Minnesota Intermediate Tax Free Fund
---------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/25/94 0.34% 2.67% 3.88%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) 0.29% 2.61% 3.83%
---------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and sale
of fund shares) 1.63% 2.83% 3.90%
---------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 2/25/94 2.78% 3.30% 4.20%
---------------------------------------------------------------------------------------------------------------------
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.06% 3.86% 4.96%
---------------------------------------------------------------------------------------------------------------------
Lipper Other States Intermediate Municipal Debt Funds
Category Average(3)
(reflects no deduction for sales charges or taxes) 2.93% 2.78% 3.79%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (0.86)%.
(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.
8
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
(BAR CHART)
<Table>
<Caption>
5.36% (1.50)% 8.76% 4.38% 8.61% 4.40% 2.89% 1.79% 3.43% 2.99%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2002 4.14%
Worst Quarter:
Quarter ended June 30, 2004 (1.96)%
</Table>
<Table>
<Caption>
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07 Date One Year Five Years Ten Years (Class A)
-----------------------------------------------------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund
-----------------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 2/1/99 0.50% 2.46% N/A 3.46%
-----------------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 10/31/86 2.99% 3.10% 4.07% N/A
-----------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions) 2.97% 3.03% 4.03% N/A
-----------------------------------------------------------------------------------------------------------------------------
Class Y (return after taxes on distributions
and sale of fund shares) 3.36% 3.19% 4.07% N/A
-----------------------------------------------------------------------------------------------------------------------------
Lehman 7-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or
taxes) 5.06% 3.86% 4.96% 4.70%
-----------------------------------------------------------------------------------------------------------------------------
Lipper Other States Intermediate Municipal Debt
Funds Category Average(3)
(reflects no reduction for sales charges or
taxes) 2.93% 2.78% 3.79% 3.59%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (1.21)%.
(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. The since inception performance of the
average is calculated from 1/31/99.
9
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
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 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)
<Table>
<Caption>
2.25% 1.00% 0.79% 2.93% 3.83%
2003 2004 2005 2006 2007
<Caption>
Best Quarter:
Quarter ended September 30, 2004 1.55%
Worst Quarter:
Quarter ended June 30, 2004 (1.37)%
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 Date One Year Five Years Inception
----------------------------------------------------------------------------------------------------------------------
Short Tax Free Fund
----------------------------------------------------------------------------------------------------------------------
Class A (return before taxes) 10/25/02 1.54% 1.70% 2.08%
----------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions) 1.54% 1.68% 2.05%
----------------------------------------------------------------------------------------------------------------------
Class A (return after taxes on distributions and
sale of fund shares) 2.10% 1.84% 2.16%
----------------------------------------------------------------------------------------------------------------------
Class Y (return before taxes) 10/25/02 3.99% 2.33% 2.67%
----------------------------------------------------------------------------------------------------------------------
Lehman 3-Year Municipal Bond Index(2)
(reflects no deduction for fees, expenses, or taxes) 5.00% 2.66% 3.03%
----------------------------------------------------------------------------------------------------------------------
Lipper Short Municipal Debt Funds Category Average(3)
(reflects no deduction for sales charges or taxes) 3.09% 2.14% 2.33%
</Table>
(1)Total return for the period from 1/1/08 through 9/30/08 was (0.22)%.
(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.
10
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Fund Summaries
Fees and Expenses
As an investor, you pay fees and expenses to buy and hold shares of the funds.
You pay shareholder fees directly when you buy or sell shares. You pay annual
fund operating expenses indirectly since they are deducted from fund assets.
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the funds.
<Table>
<Caption>
--------------------------------------------------------------------------------------------------
SHAREHOLDER FEES(1)
(fees paid directly from your investment) Class A(2) 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
--------------------------------------------------------------------------------------------------
</Table>
(1)An annual account maintenance fee of $50 may be charged under certain
circumstances. See "Policies and Services -- Purchasing, Redeeming, and
Exchanging Shares -- Additional Information on Purchasing, Redeeming, and
Exchanging Shares -- Accounts with Low Balances."
(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
contingent deferred sales charge.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
(as a percentage of average net assets)
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
Acquired
Distribution and/or Fund Fees Total Annual
Management Service (12b-1) Other and Fund Operating Less Fee
CLASS A Fees Fees(1) Expenses Expenses(2) Expenses(3) Waivers(1,4)
---------------------------------------------------------------------------------------------------------------------------
California Intermediate Tax
Free Fund 0.50% 0.25% 0.52% -- 1.27% (0.57)%
Colorado Intermediate Tax
Free Fund 0.50% 0.25% 0.58% -- 1.33% (0.48)%
Intermediate Tax Free Fund 0.50% 0.25% 0.27% -- 1.02% (0.27)%
Minnesota Intermediate Tax
Free Fund 0.50% 0.25% 0.32% 0.01% 1.08% (0.32)%
Oregon Intermediate Tax Free
Fund 0.50% 0.25% 0.37% -- 1.12% (0.27)%
Short Tax Free Fund 0.50% 0.25% 0.36% 0.01% 1.12% (0.36)%
---------------------------------------------------------------------------------------------------------------------------
<Caption>
-----------------------------------------------------
Net
CLASS A Expenses(1,4)
-----------------------------------------------------
California Intermediate Tax
Free Fund 0.70%
Colorado Intermediate Tax
Free Fund 0.85%
Intermediate Tax Free Fund 0.75%
Minnesota Intermediate Tax
Free Fund 0.76%
Oregon Intermediate Tax Free
Fund 0.85%
Short Tax Free Fund 0.76%
-----------------------------------------------------
</Table>
(1)The distributor has contractually agreed to limit its Class A 12b-1 fees for
each fund to 0.15% through October 31, 2009. In addition, the advisor has
contractually agreed to reimburse an additional amount of Class A share 12b-1
fees equal to 0.15%, 0.10% and 0.10% of average daily net assets for
California Intermediate Tax Free Fund, Intermediate Tax Free Fund and
Minnesota Intermediate Tax Free Fund, respectively, through October 31, 2009.
(2)In addition to the funds' total annual operating expenses that the funds bear
directly, the funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the funds invest.
(3)Total Annual Fund 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 funds' most recent annual report and
financial highlights reflect the operating expenses of the funds and do not
include Acquired Fund Fees and Expenses.
(4)The advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after waivers by the advisor and the distributor and excluding
Acquired Fund Fees and Expenses, do not exceed 0.70% for California
Intermediate Tax Free Fund, 0.75% for Intermediate Tax Free Fund, Minnesota
Intermediate Tax Free Fund, and Short Tax Free Fund, and 0.85% for Colorado
Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund. These fee
waivers and expense reimbursements may be terminated at any time after
October 31, 2009, at the discretion of the advisor. Prior to that time, such
waivers and reimbursements may not be terminated without the approval of the
funds' board of directors.
11
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Fund Summaries
Fees and Expenses continued
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
Acquired
Distribution and/or Fund Fees Total Annual
Management Service (12b-1) Other and Fund Operating Less Fee
CLASS Y Fees Fees Expenses Expenses(1) Expenses(2) Waivers(3)
---------------------------------------------------------------------------------------------------------------------------
California Intermediate Tax
Free Fund 0.50% None 0.52% -- 1.02% (0.32)%
Colorado Intermediate Tax Free
Fund 0.50% None 0.58% -- 1.08% (0.38)%
Intermediate Tax Free Fund 0.50% None 0.27% -- 0.77% (0.07)%
Minnesota Intermediate Tax Free
Fund 0.50% None 0.32% 0.01% 0.83% (0.12)%
Oregon Intermediate Tax Free
Fund 0.50% None 0.37% -- 0.87% (0.17)%
Short Tax Free Fund 0.50% None 0.36% 0.01% 0.87% (0.26)%
---------------------------------------------------------------------------------------------------------------------------
<Caption>
-----------------------------------------------------
Net
CLASS Y Expenses(3)
-----------------------------------------------------
California Intermediate Tax
Free Fund 0.70%
Colorado Intermediate Tax Free
Fund 0.70%
Intermediate Tax Free Fund 0.70%
Minnesota Intermediate Tax Free
Fund 0.71%
Oregon Intermediate Tax Free
Fund 0.70%
Short Tax Free Fund 0.61%
-----------------------------------------------------
</Table>
(1)In addition to the funds' total annual operating expenses that the funds bear
directly, the funds' shareholders indirectly bear the expenses of the
acquired funds (affiliated and unaffiliated) in which the funds invest.
(2)Total Annual Fund Operating Expenses are based on the funds' most recently
completed fiscal year, absent any expense reimbursements or fee waivers. The
funds' most recent annual report and financial highlights reflect the
operating expenses of the funds and do not include Acquired Fund Fees and
Expenses.
(3)The advisor has contractually agreed to waive fees and reimburse other fund
expenses through October 31, 2009, so that total annual fund operating
expenses, after waivers and excluding Acquired Fund Fees and Expenses, 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. These fee waivers and expense reimbursements may be terminated at any
time after October 31, 2009, at the discretion of the advisor. Prior to that
time, such waivers and reimbursements may not be terminated without the
approval of the funds' board of directors.
EXAMPLES These examples are intended to help you compare the cost of investing
in each 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 each fund's operating expenses remain the same.
Although your actual costs and returns may differ, based on these assumptions
your costs would be:
<Table>
<Caption>
CLASS A One Year Three Years Five Years Ten Years
California Intermediate Tax Free Fund $295 $564 $853 $1,675
---------------------------------------------------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund $310 $591 $892 $1,749
---------------------------------------------------------------------------------------------------------------------------
Intermediate Tax Free Fund $300 $516 $750 $1,421
---------------------------------------------------------------------------------------------------------------------------
Minnesota Intermediate Tax Free Fund $301 $530 $777 $1,484
---------------------------------------------------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund $310 $547 $803 $1,534
---------------------------------------------------------------------------------------------------------------------------
Short Tax Free Fund $301 $538 $794 $1,526
</Table>
<Table>
<Caption>
CLASS Y One Year Three Years Five Years Ten Years
---------------------------------------------------------------------------------------------------------------------------
California Intermediate Tax Free Fund $72 $293 $532 $1,219
---------------------------------------------------------------------------------------------------------------------------
Colorado Intermediate Tax Free Fund $72 $306 $559 $1,283
---------------------------------------------------------------------------------------------------------------------------
Intermediate Tax Free Fund $72 $239 $421 $948
---------------------------------------------------------------------------------------------------------------------------
Minnesota Intermediate Tax Free Fund $73 $253 $449 $1,014
---------------------------------------------------------------------------------------------------------------------------
Oregon Intermediate Tax Free Fund $72 $261 $466 $1,057
---------------------------------------------------------------------------------------------------------------------------
Short Tax Free Fund $62 $252 $457 $1,049
</Table>
12
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
More About the Funds
Investment Strategies 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.
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.
13
PROSPECTUS - First American Short &
Intermediate Tax Free 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, as permitted by the Securities and Exchange
Commission (SEC).
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.
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 group retirement and employee benefit plans and to
certain persons who are charged fees for advisory, investment, consulting or
similar services by a financial intermediary or other service provider. Such
persons may include, but are not limited to, individuals, corporations, and
endowments.
Class Share Overview
<Table>
<Caption>
Contingent Annual
Front-End Deferred 12b-1 Fees
Sales Charge Sales Charge (as a % of
(FESC) (CDSC) net assets)
----------------------------------------------------------------
Class A 2.25%(1) 0.00%(2) 0.25%
Class Y None None None
----------------------------------------------------------------
</Table>
(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.
DETERMINING YOUR SHARE PRICE
Because the current prospectus and Statement of Additional Information are
available on First American Funds' website free of charge, we do not disclose
the following share class information separately on the website.
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.
<Table>
<Caption>
Sales Charge
-----------------------------
As a % As a %
of of Net
Offering Amount
Purchase Amount Price Invested
-----------------------------------------------------------
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%
</Table>
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 (for funds that offered
such share class prior to July 1, 2008), 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
14
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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 (for funds that had offered such share class prior
to July 1, 2008), 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 make an aggregate investment of $50,000 or
more over a 13-month period in Class A or Class C shares of one or more First
American Funds, other than 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.
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.
- persons who hold shares of a First American money market fund pursuant to an
arrangement, which has subsequently terminated, under which the money market
fund had served as a cash investment option for another mutual fund family,
but only with respect to exchanges of those shares (including shares
representing reinvested dividends) for shares of other First American funds.
- persons who held shares of a tax free income fund of another mutual fund
family, where such other fund was subsequently liquidated or merged into
another mutual fund, or where the liquidation or merger is pending, provided
the purchase of Class A shares is made prior to June 30, 2009.
- group retirement and employee benefit plans.
You must notify the funds or your financial intermediary if you are eligible to
purchase Class A shares without a sales charge.
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
15
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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.
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.
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 distributor has
agreed to limit its Class A 12b-1 fees for each fund to 0.15% through October
31, 2009. In addition, the advisor has agreed to reimburse an additional amount
of Class A share 12b-1 fees equal to 0.15%, 0.10%, and 0.10% of average daily
net assets for California Intermediate Tax Free Fund, Intermediate Tax Free
Fund, and Minnesota Intermediate Tax Free Fund, respectively, through October
31, 2009. The funds do not pay 12b-1 fees on Class Y shares. Because 12b-1 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:
<Table>
<Caption>
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%
</Table>
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 to selected intermediaries 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
the intermediary or its representatives to recommend or offer shares of the
funds to you. The intermediary may elevate the prominence or profile of the
funds within the intermediary's organization by, for example, placement on a
list of preferred or recommended funds, and/or
16
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
granting the advisor and/or the distributor preferential or enhanced
opportunities to promote the funds in various ways within the intermediary's
organization. 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 First American Fund shares that the intermediary sells or may sell; the
value of the assets invested in the First American Funds by the intermediary's
customers; 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. Such payments are generally asset based but also may
include the payment of a lump sum for services provided. In addition, the
advisor and/or the distributor may make payments to reimburse selected
intermediaries for items such as ticket charges (i.e., fees that an intermediary
charges its representatives for effecting transactions in fund shares),
operational charges, literature printing and/or distribution costs, and
networking fees.
The advisor and/or distributor may make other payments or allow other
promotional incentives to financial intermediaries to the extent permitted by
SEC and FINRA rules and by other applicable laws and regulations.
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 only 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.
<Table>
<Caption>
Minimum Minimum
Initial Additional
ACCOUNT TYPES Investment Investment
-----------------------------------------------------------------------------------------------------------
Uniform Gift to Minors Act (UGMA)/
Uniform Transfers to Minors Act (UTMA) accounts $ 500 $ 25
All other accounts $1,000 $100
</Table>
The funds reserve the right to waive or lower purchase minimums under certain
circumstances and to reject any purchase order. As of January 1, 2009, the
minimum initial investment will increase to $2,500 for all accounts and
additional investments will be allowed for as little as $100 for all accounts.
By Phone. You can purchase shares by calling your financial intermediary, if it
has a sales agreement with the funds' distributor. Once the initial minimum
investment has been made, you can also place purchase orders in amounts equal to
or greater than the minimum additional investment amount for your account type
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, or public offering price as applicable based on your share
class, 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:
<Table>
<Caption>
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
</Table>
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.
17
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
- Cash, money orders, cashier's checks in amounts less than $10,000, third-party
checks, Treasury checks, credit card checks, traveler's checks, starter
checks, and credit cards will not be accepted. We are unable to accept post
dated checks, post dated on-line bill pay checks, or any conditional order or
payment.
- If a check or ACH transaction does not clear your bank, the funds reserve the
right to cancel the purchase, and you may be charged a fee of $25 per check or
transaction. You could be liable for any losses or fees incurred by the fund
as a result of your check or ACH transaction 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 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 are normally sent on the next business day,
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 you have previously supplied your bank account
information to the fund) or sent to you by check. The funds charge a $15 fee for
wire redemptions, but have the right to waive this fee for shares redeemed
through certain financial intermediaries and by certain individuals. 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. Credit
is usually available within 2-3 business days. The First American Funds reserve
the right to limit telephone redemptions to $50,000 per account 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:
<Table>
<Caption>
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
</Table>
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
After you have established your account, signatures on a written request must be
guaranteed if:
- you would like redemption proceeds to be paid to any person, address, or bank
account other than that on 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 in excess of $50,000.
- bank information related to an automatic investment plan, telephone purchase
or telephone redemption is changed.
In addition to the situations described above, the funds reserve the right to
require a signature guarantee in other instances based on the circumstances of a
particular situation.
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 pre-printed savings account deposit slip. 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
18
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
amount from your account on a regular basis. You may set up systematic
withdrawals when you complete a new account form or by calling 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.
By Systematic Exchange Plan. You may add to your investment on a regular basis
through automatic monthly exchanges of one 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.
Systematic Transactions You may add to your investment, or redeem a specific
dollar amount from your account, on a regular, automatic basis through a
systematic investment or withdrawal plan. You may also move from one First
American Fund to another First American Fund of the same class on a regular
basis through automatic monthly exchanges. You may apply for participation in
these programs through 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.
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. The fund does not calculate its NAV on
national holidays, or any other days, on which the NYSE is closed for trading.
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
19
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
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 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.
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.
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
20
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Purchasing, Redeeming, and Exchanging Shares continued
of its customers. The funds generally seek to apply their short-term trading
policies and procedures to these omnibus account arrangements, and monitor
trading activity at the omnibus account level to attempt to identify disruptive
trades. Under agreements that the funds (or the funds' distributor) have entered
into with intermediaries, the funds may request transaction information from
intermediaries at any time in order to determine whether there has been short-
term trading by the intermediaries' customers. The funds will request that the
intermediary provide additional 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 intermediary take appropriate action to curtail the activity. If the
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. An intermediary may apply
its own short-term trading policies and procedures, which may be more or less
restrictive than the funds' policies and procedures. If you purchase or sell
fund shares through an intermediary, you should contact them to determine
whether they impose different requirements or restrictions.
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.
Once a telephone transaction has been placed, it cannot be canceled or modified.
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
The funds reserve the right to liquidate or assess a low balance fee to any
account holding a balance that is less than the account balance minimum of $500
for any reason, including market fluctuation.
Annually, on or about the second Wednesday of August, the funds will assess a
$15 low balance fee to certain retirement accounts, education savings plans, and
UGMA/UTMA accounts that have balances under the account balance minimum. At the
same time, other accounts with balances under the account balance minimum will
be liquidated, with proceeds being mailed to the address of record. Shareholders
will receive a communication reminding them of this scheduled action in their
second quarter account statements, thereby providing time to ensure that
balances are at or above the account balance minimum prior to the assessment of
the low balance fee or liquidation of low balance accounts.
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, if you redeem more than $250,000 of a fund's assets within a 30-
day period, each fund reserves the right to pay part or all of the proceeds from
a redemption request in a proportionate share of securities from the fund's
portfolio instead of cash. The advisor 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.
21
PROSPECTUS - First American Short &
Intermediate Tax Free 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 report of independent registered public accounting
firm.
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 generally are mailed following each purchase or sale of fund
shares, but some transactions, 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 you place
a purchase order or 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.
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.
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.
State Taxes on Distributions
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
22
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Policies and Services
Managing Your Investment CONTINUED
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.
More information about tax considerations that may affect the funds and their
shareholders appears in the funds' SAI.
23
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Management
FAF Advisors, 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 September 30,
2008, FAF Advisors had more than $99 billion in assets under management,
including investment company assets of more than $86 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 year.
<Table>
<Caption>
Management fee
as a % of average
daily net assets
------------------------------------------------------
CALIFORNIA INTERMEDIATE TAX FREE
FUND 0.18%
COLORADO INTERMEDIATE TAX FREE FUND 0.12%
INTERMEDIATE TAX FREE FUND 0.43%
MINNESOTA INTERMEDIATE TAX FREE
FUND 0.38%
OREGON INTERMEDIATE TAX FREE FUND 0.33%
SHORT TAX FREE FUND 0.24%
------------------------------------------------------
</Table>
A discussion regarding the basis for the board's approval of the funds'
investment advisory agreement appears in the funds' annual report to
shareholders for the fiscal year ended June 30, 2008.
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 0.25% 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 to
these fees, the funds may reimburse FAF Advisors for any out-of-pocket expenses
incurred in providing administration services.
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 on a
per shareholder account basis, subject to a minimum per share class fee. In
addition, the funds may reimburse Fund Services for any out-of-pocket expenses
incurred in providing transfer agency services.
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 "Policies and Services -- Purchasing, Redeeming, and
Exchanging Shares -- Additional Payments to Financial Intermediaries."
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 Michael L. Welle has
co-managed the fund since June 2007.
24
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Management continued
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 June 2007.
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. Michael L. Welle has served as the primary portfolio
manager for the fund since June 2007 and Christopher L. Drahn has co-managed the
fund since October 2002.
PORTFOLIO MANAGER BIOGRAPHIES
Christopher L. Drahn, CFA, Senior Fixed-Income Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1980.
Michael S. Hamilton, Senior Fixed-Income Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1989.
Michael L. Welle, CFA, Fixed-Income Trader, Portfolio Manager, entered the
financial services industry when he joined FAF Advisors in 1992.
Douglas J. White, CFA, Head of Tax Exempt Fixed Income, entered the financial
services industry in 1983 and joined FAF Advisors in 1987.
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.
25
PROSPECTUS - First American Short &
Intermediate Tax Free Income 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
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.07 $10.11 $10.35 $10.55 $10.64 $10.80
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.38 0.38 0.28 0.39 0.40 0.41
Realized and Unrealized Gains (Losses) on
Investments (0.06) 0.01 (0.20) (0.13) (0.05) (0.14)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.32 0.39 0.08 0.26 0.35 0.27
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.39) (0.38) (0.29) (0.39) (0.41) (0.41)
Distributions (from net realized gains) (0.01) (0.05) (0.03) (0.07) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Total Distributions (0.40) (0.43) (0.32) (0.46) (0.44) (0.43)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.99 $10.07 $10.11 $10.35 $10.55 $10.64
====== ====== ====== ====== ====== ======
Total Return(2) 3.20% 3.86% 0.78% 2.51% 3.36% 2.58%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $4,463 $6,226 $3,441 $3,946 $3,381 $4,262
Ratio of Expenses to Average Net Assets 0.73% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.83% 3.66% 3.73% 3.71% 3.78% 3.86%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.27% 1.25% 1.22% 1.10% 1.06% 1.06%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.29% 3.26% 3.36% 3.46% 3.57% 3.65%
Portfolio Turnover Rate 25% 20% 21% 29% 20% 17%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year Fiscal period
ended ended Fiscal year ended September 30,
CLASS Y SHARES 2008 June 30, 2007 June 30, 2006(1) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.09 $ 10.13 $ 10.37 $ 10.57 $ 10.66 $ 10.81
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.39 0.39 0.30 0.40 0.41 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.06) 0.01 (0.21) (0.13) (0.05) (0.14)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.33 0.40 0.09 0.27 0.36 0.29
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.39) (0.39) (0.30) (0.40) (0.42) (0.42)
Distributions (from net realized gains) (0.01) (0.05) (0.03) (0.07) (0.03) (0.02)
------- ------- ------- ------- ------- -------
Total Distributions (0.40) (0.44) (0.33) (0.47) (0.45) (0.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.02 $ 10.09 $ 10.13 $ 10.37 $ 10.57 $ 10.66
======= ======= ======= ======= ======= =======
Total Return(2) 3.33% 4.01% 0.88% 2.66% 3.51% 2.83%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $52,924 $52,966 $51,726 $49,292 $46,953 $44,600
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 3.84% 3.82% 3.89% 3.86% 3.93% 4.02%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.02% 1.00% 0.97% 0.85% 0.81% 0.81%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 3.52% 3.52% 3.62% 3.71% 3.82% 3.91%
Portfolio Turnover Rate 25% 20% 21% 29% 20% 17%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
26
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Financial Highlights CONTINUED
Colorado Intermediate Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $10.33 $10.40 $10.74 $ 10.98 $ 11.08 $ 11.12
------ ------ ------ ------- ------- -------
Investment Operations:
Net Investment Income 0.41 0.43 0.32 0.42 0.45 0.41
Realized and Unrealized Gains (Losses) on
Investments (0.10) 0.01 (0.28) (0.19) (0.11) (0.02)
------ ------ ------ ------- ------- -------
Total From Investment Operations 0.31 0.44 0.04 0.23 0.34 0.39
------ ------ ------ ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.40) (0.43) (0.32) (0.43) (0.44) (0.43)
Distributions (from net realized gains) (0.05) (0.08) (0.06) (0.04) -- --
------ ------ ------ ------- ------- -------
Total Distributions (0.45) (0.51) (0.38) (0.47) (0.44) (0.43)
------ ------ ------ ------- ------- -------
Net Asset Value, End of Period $10.19 $10.33 $10.40 $ 10.74 $ 10.98 $ 11.08
====== ====== ====== ======= ======= =======
Total Return(2) 3.04% 4.21% 0.37% 2.11% 3.12% 3.64%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,199 $6,783 $9,577 $13,426 $13,969 $22,555
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.92% 3.99% 4.02% 3.85% 4.00% 3.79%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.33% 1.36% 1.27% 1.10% 1.06% 1.06%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.44% 3.48% 3.60% 3.60% 3.79% 3.58%
Portfolio Turnover Rate 21% 35% 17% 20% 4% 14%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.30 $ 10.38 $ 10.72 $ 10.95 $ 11.05 $ 11.10
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.42 0.43 0.33 0.43 0.46 0.43
Realized and Unrealized Gains (Losses) on
Investments (0.09) 0.01 (0.28) (0.18) (0.11) (0.03)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.33 0.44 0.05 0.25 0.35 0.40
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.42) (0.44) (0.33) (0.44) (0.45) (0.45)
Distributions (from net realized gains) (0.05) (0.08) (0.06) (0.04) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.47) (0.52) (0.39) (0.48) (0.45) (0.45)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.16 $ 10.30 $ 10.38 $ 10.72 $ 10.95 $ 11.05
======= ======= ======= ======= ======= =======
Total Return(2) 3.20% 4.28% 0.49% 2.36% 3.29% 3.71%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $43,933 $34,447 $32,661 $34,562 $37,748 $47,854
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 4.05% 4.14% 4.18% 4.01% 4.15% 3.94%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.08% 1.11% 1.02% 0.85% 0.81% 0.81%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.67% 3.73% 3.86% 3.86% 4.04% 3.83%
Portfolio Turnover Rate 21% 35% 17% 20% 4% 14%
-------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
27
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Financial Highlights CONTINUED
Intermediate Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.63 $ 10.63 $ 10.92 $ 11.18 $ 11.30 $ 11.32
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.44 0.44 0.32 0.44 0.44 0.44
Realized and Unrealized Gains (Losses) on
Investments (0.09) 0.01 (0.26) (0.19) (0.10) (0.03)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.35 0.45 0.06 0.25 0.34 0.41
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.43) (0.44) (0.32) (0.45) (0.45) (0.43)
Distributions (from net realized gains) (0.04) (0.01) (0.03) (0.06) (0.01) --
------- ------- ------- ------- ------- -------
Total Distributions (0.47) (0.45) (0.35) (0.51) (0.46) (0.43)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.51 $ 10.63 $ 10.63 $ 10.92 $ 11.18 $ 11.30
======= ======= ======= ======= ======= =======
Total Return(2) 3.33% 4.27% 0.56% 2.31% 3.06% 3.74%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $27,554 $29,687 $32,521 $34,658 $35,276 $34,231
Ratio of Expenses to Average Net Assets 0.77% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 4.10% 4.08% 3.95% 3.98% 3.98% 3.91%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.02% 1.02% 1.05% 1.05% 1.05% 1.05%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.85% 3.91% 3.75% 3.78% 3.78% 3.71%
Portfolio Turnover Rate 19% 27% 15% 15% 10% 15%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period Fiscal year ended September
June 30, ended 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.61 $ 10.61 $ 10.90 $ 11.16 $ 11.28 $ 11.30
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.44 0.45 0.33 0.46 0.46 0.46
Realized and Unrealized Gains (Losses) on
Investments (0.08) 0.01 (0.26) (0.19) (0.11) (0.03)
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.36 0.46 0.07 0.27 0.35 0.43
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.44) (0.45) (0.33) (0.47) (0.46) (0.45)
Distributions (from net realized gains) (0.04) (0.01) (0.03) (0.06) (0.01) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.48) (0.46) (0.36) (0.53) (0.47) (0.45)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.49 $ 10.61 $ 10.61 $ 10.90 $ 11.16 $ 11.28
======== ======== ======== ======== ======== ========
Total Return(2) 3.41% 4.43% 0.67% 2.47% 3.22% 3.90%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $630,820 $554,618 $596,306 $641,141 $637,361 $696,994
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 4.17% 4.23% 4.10% 4.13% 4.13% 4.05%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.77% 0.77% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 4.10% 4.16% 4.00% 4.03% 4.03% 3.95%
Portfolio Turnover Rate 19% 27% 15% 15% 10% 15%
--------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
28
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Financial Highlights CONTINUED
Minnesota Intermediate Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.83 $ 9.88 $ 10.16 $ 10.34 $ 10.44 $ 10.51
------- ------- ------- ------- ------- -------
Investment Operations:
Net Investment Income 0.39 0.39 0.29 0.39 0.39 0.40
Realized and Unrealized Gains (Losses) on
Investments (0.05) (0.01) (0.22) (0.15) (0.08) (0.04)
------- ------- ------- ------- ------- -------
Total From Investment Operations 0.34 0.38 0.07 0.24 0.31 0.36
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income) (0.39) (0.38) (0.29) (0.39) (0.39) (0.41)
Distributions (from net realized gains) (0.03) (0.05) (0.06) (0.03) (0.02) (0.02)
------- ------- ------- ------- ------- -------
Total Distributions (0.42) (0.43) (0.35) (0.42) (0.41) (0.43)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 9.75 $ 9.83 $ 9.88 $ 10.16 $ 10.34 $ 10.44
======= ======= ======= ======= ======= =======
Total Return(2) 3.53% 3.87% 0.74% 2.33% 3.03% 3.55%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $22,059 $21,153 $26,526 $32,326 $35,047 $31,044
Ratio of Expenses to Average Net Assets 0.77% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.95% 3.86% 3.85% 3.78% 3.77% 3.85%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.07% 1.07% 1.08% 1.06% 1.05% 1.05%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.65% 3.64% 3.62% 3.57% 3.57% 3.65%
Portfolio Turnover Rate 15% 18% 11% 15% 8% 15%
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.78 $ 9.83 $ 10.11 $ 10.29 $ 10.40 $ 10.46
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.39 0.40 0.30 0.40 0.41 0.42
Realized and Unrealized Gains (Losses) on
Investments (0.05) -- (0.22) (0.15) (0.10) (0.03)
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.34 0.40 0.08 0.25 0.31 0.39
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.40) (0.40) (0.30) (0.40) (0.40) (0.43)
Distributions (from net realized gains) (0.03) (0.05) (0.06) (0.03) (0.02) (0.02)
-------- -------- -------- -------- -------- --------
Total Distributions (0.43) (0.45) (0.36) (0.43) (0.42) (0.45)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.69 $ 9.78 $ 9.83 $ 10.11 $ 10.29 $ 10.40
======== ======== ======== ======== ======== ========
Total Return(2) 3.51% 4.05% 0.85% 2.50% 3.10% 3.82%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $175,681 $168,920 $175,485 $197,251 $216,906 $238,958
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 4.02% 4.01% 4.00% 3.93% 3.92% 4.01%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.82% 0.82% 0.83% 0.81% 0.80% 0.80%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.90% 3.89% 3.87% 3.82% 3.82% 3.91%
Portfolio Turnover Rate 15% 18% 11% 15% 8% 15%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
29
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Financial Highlights CONTINUED
Oregon Intermediate Tax Free Fund
<Table>
<Caption>
Fiscal year
ended Fiscal period Fiscal year ended
June 30, ended September 30,
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.72 $ 9.78 $10.07 $10.30 $10.43 $10.49
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.35 0.37 0.27 0.36 0.37 0.37
Realized and Unrealized Gains (Losses) on
Investments (0.02) (0.02) (0.25) (0.19) (0.05) (0.03)
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.33 0.35 0.02 0.17 0.32 0.34
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.36) (0.37) (0.27) (0.36) (0.37) (0.38)
Distributions (from net realized gains) (0.01) (0.04) (0.04) (0.04) (0.08) (0.02)
------ ------ ------ ------ ------ ------
Total Distributions (0.37) (0.41) (0.31) (0.40) (0.45) (0.40)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.68 $ 9.72 $ 9.78 $10.07 $10.30 $10.43
====== ====== ====== ====== ====== ======
Total Return(2) 3.39% 3.54% 0.16% 1.67% 3.20% 3.31%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $5,967 $7,895 $9,456 $9,356 $8,700 $8,189
Ratio of Expenses to Average Net Assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of Net Investment Income to Average Net
Assets 3.64% 3.71% 3.62% 3.56% 3.62% 3.67%
Ratio of Expenses to Average Net Assets (excluding
waivers) 1.12% 1.12% 1.11% 1.06% 1.05% 1.05%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.37% 3.44% 3.36% 3.35% 3.42% 3.47%
Portfolio Turnover Rate 15% 43% 13% 20% 12% 17%
----------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year
ended Fiscal period
June 30, ended Fiscal year ended September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.72 $ 9.78 $ 10.07 $ 10.30 $ 10.43 $ 10.49
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.37 0.38 0.28 0.38 0.39 0.40
Realized and Unrealized Gains (Losses) on
Investments (0.03) (0.02) (0.25) (0.19) (0.05) (0.05)
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.34 0.36 0.03 0.19 0.34 0.35
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.37) (0.38) (0.28) (0.38) (0.39) (0.39)
Distributions (from net realized gains) (0.01) (0.04) (0.04) (0.04) (0.08) (0.02)
-------- -------- -------- -------- -------- --------
Total Distributions (0.38) (0.42) (0.32) (0.42) (0.47) (0.41)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.68 $ 9.72 $ 9.78 $ 10.07 $ 10.30 $ 10.43
======== ======== ======== ======== ======== ========
Total Return(2) 3.54% 3.70% 0.28% 1.82% 3.35% 3.46%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $120,800 $109,357 $111,344 $133,613 $137,869 $146,244
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 3.78% 3.86% 3.77% 3.71% 3.77% 3.82%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.87% 0.87% 0.86% 0.81% 0.80% 0.80%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 3.61% 3.69% 3.61% 3.60% 3.67% 3.72%
Portfolio Turnover Rate 15% 43% 13% 20% 12% 17%
------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
30
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
Additional Information
Financial Highlights CONTINUED
Short Tax Free Fund
<Table>
<Caption>
Fiscal year Fiscal year
ended Fiscal period ended Fiscal period
June 30, ended September 30, ended
CLASS A SHARES 2008 2007 June 30, 2006(1) 2005 2004 September 30, 2003(2)
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.70 $ 9.68 $ 9.78 $ 9.96 $10.18 $10.00
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income 0.30 0.28 0.19 0.24 0.26 0.26
Realized and Unrealized Gains (Losses) on
Investments 0.10 0.03 (0.09) (0.17) (0.17) 0.19
------ ------ ------ ------ ------ ------
Total From Investment Operations 0.40 0.31 0.10 0.07 0.09 0.45
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income) (0.31) (0.29) (0.20) (0.25) (0.25) (0.27)
Distributions (from net realized gains) -- -- -- -- (0.06) --
------ ------ ------ ------ ------ ------
Total Distributions (0.31) (0.29) (0.20) (0.25) (0.31) (0.27)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $ 9.79 $ 9.70 $ 9.68 $ 9.78 $ 9.96 $10.18
====== ====== ====== ====== ====== ======
Total Return(3) 4.17% 3.22% 1.02% 0.67% 0.90% 4.54%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $2,308 $2,410 $3,321 $4,103 $6,329 $6,448
Ratio of Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net
Assets 3.05% 2.94% 2.65% 2.46% 2.55% 2.67%
Ratio of Expenses to Average Net Assets
(excluding waivers) 1.11% 1.08% 1.08% 1.06% 1.05% 1.05%
Ratio of Net Investment Income to Average Net
Assets (excluding waivers) 2.69% 2.61% 2.32% 2.15% 2.25% 2.37%
Portfolio Turnover Rate 58% 57% 22% 37% 30% 54%
----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
<Table>
<Caption>
Fiscal year Fiscal year Fiscal period
ended Fiscal period ended ended
June 30, ended September 30, September 30,
CLASS Y SHARES 2008 2007 June 30, 2006(1) 2005 2004 2003(2)
---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Asset Value, Beginning of Period $ 9.70 $ 9.68 $ 9.78 $ 9.96 $ 10.18 $ 10.00
-------- -------- -------- -------- -------- --------
Investment Operations:
Net Investment Income 0.31 0.31 0.21 0.26 0.27 0.28
Realized and Unrealized Gains (Losses) on
Investments 0.10 0.01 (0.10) (0.18) (0.17) 0.18
-------- -------- -------- -------- -------- --------
Total From Investment Operations 0.41 0.32 0.11 0.08 0.10 0.46
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment income) (0.32) (0.30) (0.21) (0.26) (0.26) (0.28)
Distributions (from net realized gains) -- -- -- -- (0.06) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.32) (0.30) (0.21) (0.26) (0.32) (0.28)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.79 $ 9.70 $ 9.68 $ 9.78 $ 9.96 $ 10.18
======== ======== ======== ======== ======== ========
Total Return(3) 4.33% 3.37% 1.13% 0.83% 1.05% 4.66%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $143,985 $161,468 $235,900 $329,647 $419,359 $396,918
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 3.20% 3.09% 2.80% 2.62% 2.70% 3.00%
Ratio of Expenses to Average Net Assets
(excluding waivers) 0.86% 0.83% 0.83% 0.81% 0.80% 0.80%
Ratio of Net Investment Income to Average
Net Assets (excluding waivers) 2.94% 2.86% 2.57% 2.41% 2.50% 2.80%
Portfolio Turnover Rate 58% 57% 22% 37% 30% 54%
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1)For the 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.
31
PROSPECTUS - First American Short &
Intermediate Tax Free Income Funds
First American Funds' Privacy Policy
We want you to understand what information we collect and how it's used.
"Nonpublic personal information" is nonpublic information that we obtain while
providing financial products or services to you.
Why we collect your information
We gather nonpublic personal information about you and your accounts so that we
can:
- Know who you are and prevent unauthorized access to your information.
- Design and improve the products we offer.
- Comply with the laws and regulations that govern us.
The types of information we collect
We may collect the following nonpublic personal information about you:
- Information about your identity, such as your name, address, and social
security number
- Information about your transactions with us
- Information you provide on applications, such as your beneficiaries
Confidentiality and security
We operate through service providers. We require our service providers to
restrict access to nonpublic personal information about you to those employees
who need that information in order to provide products or services to you. We
also require them to maintain physical, electronic, and procedural safeguards
that comply with applicable federal standards and regulations to guard your
information.
What information we disclose
We may share all of the nonpublic personal information that we collect about you
with our affiliated providers of financial services, including our family of
funds and their advisor, and with companies that perform marketing services on
our behalf.
We're permitted by law to disclose nonpublic personal information about you to
other third parties in certain circumstances. For example, we may disclose
nonpublic personal information about you to affiliated and nonaffiliated third
parties to assist us in servicing your account (e.g., mailing of fund-related
materials) and to government entities (e.g., IRS for tax purposes).
We'll continue to adhere to the privacy policies and practices described here
even after your account is closed or becomes inactive.
Additional rights and protections
You may have other privacy protections under applicable state laws, such as
California and Vermont. To the extent that these state laws apply, we will
comply with them when we share information about you. This privacy policy does
not apply to your relationship with other financial service providers, such as
broker-dealers. We may amend this privacy notice at any time, and we will inform
you of changes as required by law.
Our pledge applies to products and services offered by:
- First American Funds, Inc.
- First American Investment Funds, Inc.
- First American Strategy Funds, Inc.
- 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.
- American Income Fund, Inc.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
THIS PAGE IS NOT PART OF THE PROSPECTUS
SHORT TAX FREE FUND (CONTINUED)
(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.
SEC file number: 811-05309 PROINTTX 10/08
--------------------------------------------------------------------------------
FIRST AMERICAN FUNDS
P.O. Box 1330
Minneapolis, MN 55440-1330
FIRST AMERICAN INVESTMENT FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 28, 2008
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 28, 2008. The
financial statements included as part of the Funds' Annual Reports to
shareholders for the fiscal period ended June 30, 2008 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.
NOTE REGARDING PROPOSED FUND MERGERS
The Board of Directors of FAIF has approved the merger of California
Intermediate Tax Free Fund into California Tax Free Fund and the merger of
Colorado Intermediate Tax Free Fund into Colorado Tax Free Fund. The mergers
must be approved by the shareholders of California Intermediate Tax Free Fund
and Colorado Intermediate Tax Free Fund, respectively. It is currently
anticipated that proxy materials regarding the mergers will be distributed to
shareholders sometime during the fourth quarter of 2008. Until the mergers are
completed, California Intermediate Tax Free Fund and Colorado Intermediate Tax
Free Fund will remain open for investment by both current and new shareholders.
TABLE OF CONTENTS
PAGE
----------
GENERAL INFORMATION ................................................ 1
ADDITIONAL INFORMATION CONCERNING FUND INVESTMENTS ................. 1
Asset-Backed Securities ......................................... 2
Brady Bonds ..................................................... 2
Collateralized Debt Obligations ................................. 3
Corporate Debt Securities ....................................... 3
Closed-End Investment Companies ................................. 3
Debt Obligations Rated Less Than Investment Grade ............... 3
Dollar Rolls .................................................... 4
Equity and Convertible Securities ............................... 4
Exchange Traded Funds ........................................... 5
Fixed and Floating Rate Debt Obligations ........................ 5
Foreign Currency Transactions ................................... 5
Foreign Securities .............................................. 6
Futures and Options on Futures .................................. 8
Guaranteed Investment Contracts ................................. 11
Inflation Protected Securities .................................. 11
Interest Rate Caps and Floors ................................... 12
Inverse Floating Rate Municipal Obligations ..................... 12
Lending of Portfolio Securities ................................. 12
Mortgage-Backed Securities ...................................... 13
Municipal Bonds and Other Municipal Obligations ................. 15
Options Transactions ............................................ 17
Participation Interests ......................................... 19
Payment-In-Kind Debentures and Delayed Interest Securities ...... 19
Real Estate Investment Trust ("REIT") Securities ................ 19
Repurchase Agreements ........................................... 20
Royalty Trusts .................................................. 20
Short-Term Temporary Investments ................................ 21
Swap Agreements ................................................. 22
Temporary Taxable Investments ................................... 23
Trust Preferred Securities ...................................... 23
U.S. Government Securities ...................................... 24
When-Issued and Delayed Delivery Transactions ................... 24
Zero Coupon Securities .......................................... 25
Special Factors Affecting Single State Tax Free Funds ........... 25
INVESTMENT RESTRICTIONS ............................................ 41
FUND NAMES ......................................................... 43
DISCLOSURE OF PORTFOLIO HOLDINGS ................................... 44
Public Disclosure ............................................... 44
Nonpublic Disclosure ............................................ 44
DIRECTORS AND EXECUTIVE OFFICERS ................................... 46
Independent Directors ........................................... 46
Executive Officers .............................................. 47
Standing Committees of the Board of Directors ................... 49
i
Fund Shares Owned by the Directors .............................. 51
Compensation .................................................... 51
Sales Loads ..................................................... 52
CODE OF ETHICS ..................................................... 52
PROXY VOTING POLICIES .............................................. 52
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS ............... 53
Investment Advisor .............................................. 53
Additional Payments to Financial Intermediaries ................. 54
Administrator ................................................... 58
Transfer Agent .................................................. 59
Distributor ..................................................... 60
Custodian and Independent Registered Public Accounting Firm ..... 64
PORTFOLIO MANAGERS ................................................. 64
Other Accounts Managed .......................................... 64
Compensation .................................................... 65
Ownership of Fund Shares ........................................ 66
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE ................. 67
CAPITAL STOCK ...................................................... 69
NET ASSET VALUE AND PUBLIC OFFERING PRICE .......................... 82
TAXATION ........................................................... 85
ADDITIONAL INFORMATION ABOUT CERTAIN SHAREHOLDER SERVICES .......... 87
Reducing Class A Sales Charges .................................. 87
Sales of Class A Shares at Net Asset Value ...................... 87
Class A Shares Reinvestment Right ............................... 88
Redeeming Shares by Telephone ................................... 88
Redeeming Shares by Mail ........................................ 89
Receipt of Orders by Financial Intermediaries ................... 89
Redemptions Before Purchase Instruments Clear ................... 89
Research Requests ............................................... 89
FINANCIAL STATEMENTS ............................................... 89
RATINGS ............................................................ Appendix A
PROXY VOTING POLICIES AND PROCEDURES ............................... Appendix B
ii
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
43 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
Intermediate Tax Free Fund, Short Tax Free Fund, and Tax Free Fund), are
diversified investment companies. The Tax Free Funds (other than Intermediate
Tax Free Fund, Short Tax Free Fund, and 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"); Mount Vernon Securities Lending Trust
(the "Mount Vernon Trust"); 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.
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. Descriptions of the rating categories of
1
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.
ASSET-BACKED SECURITIES
Core Bond Fund, Inflation Protected Securities Fund, Intermediate Term
Bond Fund, Short Term Bond Fund, and Total Return Bond 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.
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.
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
described below under "--Mortgage-Backed Securities," 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.
2
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.
CLOSED-END INVESTMENT COMPANIES
The Bond 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, to the extent permitted under the 1940 Act. 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.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
Core Bond Fund, Inflation Protected Securities Fund, Short Term Bond
Fund, Total Return Bond 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 Baa, 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 FAF Advisors, Inc.,
the Funds' investment advisor ("FAF Advisors" or the "Advisor"). Core Bond Fund,
Short Term Bond Fund, and 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 Caa, respectively, unless only one of those
rating agencies rates the security, in which case that rating must be at least
CCC or Caa, 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.
3
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.
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, Intermediate Term Bond Fund, and Total Return 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.
EQUITY AND CONVERTIBLE SECURITIES
As a non-principal investment strategy, High Income Bond Fund and
Total Return Bond Fund may invest in equity securities, including common stock,
master limited partnership (MLP) and other partnership units. The advisor
anticipates that such investments will consist predominantly of income-oriented
equity securities or partnership units. Common stock represents units of
ownership in a corporation. Owners typically are entitled to vote on the
selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. The price
of common stock is generally determined by corporate earnings, type of products
or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades. Stocks may decline significantly in price over short or extended periods
of time. Price changes may occur in the market as a whole, or they may occur in
only a particular country, company, industry, or sector of the market. In
addition, the types of stocks in which a particular fund invests may
underperform the market or may not pay dividends as anticipated.
MLPs are limited partnerships in which the ownership units (i.e.,
limited partnership interests) are publicly traded. MLP units are registered
with the SEC and are freely traded on a securities exchange or in the
over-the-counter market. Many MLPs operate in the oil and gas related
businesses, including energy processing and distribution. Many MLPs are
pass-through entities that generally are taxed at the unit holder level and are
not subject to federal or state income tax at the partnership level. Annual
income, gains, losses, deductions and credits of an MLP pass through directly to
its unitholders. Distributions from an MLP may consist in part of a return of
capital. Generally, an MLP is operated under the supervision of one or more
general partners. Limited partners are not involved in the day-to-day management
of the partnership. The risks of investing in an MLP are generally those
involved in investing in a partnership as opposed to a corporation. For example,
state law governing partnerships is often less restrictive than state law
governing corporations. Accordingly, there may be fewer protections afforded
investors in an MLP than investors in a corporation. Investments held by MLPs
may be relatively illiquid, limiting the MLPs' ability to vary their portfolios
promptly in response to changes in economic or other conditions. MLPs may have
limited financial resources, their securities may trade infrequently and in
limited volume, and they may be subject to more abrupt or erratic price
movements than securities of larger or more broadly-based companies. Investment
in MLPs by High Income Bond Fund and Total Return Bond Fund also subject these
Funds to the risks associated with the specific industry or industries in which
the MLPs invest. Additionally, since MLPs generally conduct business in multiple
states, the Funds may be subject to income or franchise tax in each of the
states in which the partnership does business. The additional cost of
4
preparing and filing the tax returns and paying the related taxes may adversely
impact the Funds' return on their investment in MLPs.
The Bond Funds other than Intermediate Government Bond Fund, U.S.
Government Mortgage 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 each of the Bond Funds as soon as practicable in an orderly manner (except
that the Bond Funds that may invest in common stocks and/or preferred stocks
directly are not required to dispose of any stock so acquired).
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.
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.
FOREIGN CURRENCY TRANSACTIONS
Core Bond Fund, Inflation Protected Securities Fund, Short Term Bond
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 U.S.
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 U.S. dollars to local currencies, and vice versa. The
Funds therefore may enter into foreign currency transactions as a principal
investment strategy.
The Funds will conduct their foreign currency transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through forward foreign currency exchange contracts
("forward currency contracts") to purchase or sell foreign currencies at a
future date.
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,
5
or to "lock in" the U.S. 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 U.S. dollars which could result from changes in exchange rates
between the U.S. 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 foreign 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 U.S. 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 Currency Contracts. A forward currency 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 Securities
and Exchange Commission ("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 currency 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, the Funds 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.
FOREIGN SECURITIES
General. Core Bond Fund, High Income Bond Fund, Inflation Protected
Securities Fund, Intermediate Term Bond Fund, Short Term Bond Fund, and Total
Return Bond Fund may invest in foreign securities as a principal investment
strategy.
6
Core Bond Fund, High Income Bond Fund, Intermediate Term Bond Fund,
and Short Term 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 U.S. 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, up to
20% of the net assets of Inflation Protected Securities Fund, 20% of the total
assets of Total Return Bond Fund, and 10% of the total assets of Core Bond Fund
and Short Term Bond Fund may be invested 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 U.S. 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 U.S. 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 U.S. domiciled company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to U.S. 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 U.S. domestic
issuers.
Emerging Markets. Core Bond Fund, High Income Bond Fund, Short Term
Bond Fund, and 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. Inflation Protected Securities Fund and
Intermediate Term Bond Fund may invest in such securities as a non-principal
investment strategy. 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.
7
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.
Depositary Receipts. The Funds' investments in foreign securities may
include investment in depositary receipts, including American Depositary
Receipts (ADRs) and European Depositary Receipts (EDRs). U.S. dollar-denominated
ADRs, which are traded in the United States on exchanges or over-the-counter,
are issued by domestic banks. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do
not eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in ADRs 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 ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the domestic market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers may be subject. The Funds may
also invest in EDRs and in other similar instruments representing securities of
foreign companies. EDRs are securities that are typically issued by foreign
banks or foreign trust companies, although U.S. banks or U.S. trust companies
may issue them. EDRs are structured similarly to the arrangements of ADRs. EDRs,
in bearer form, are designed for use in European securities markets and are not
necessarily denominated in the currency of the underlying security.
Certain 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.
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 above 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 below under "--Options
Transactions"). 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
8
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 may 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. The Funds may also
enter into over-the-counter (OTC) transactions in such instruments. 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.
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
9
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
10
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.
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.
INFLATION PROTECTED SECURITIES
Inflation Protected Securities Fund invests in inflation protected
securities as a principal investment strategy. The other 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.
11
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.
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.
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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, as a principal investment
strategy, each of the Bond 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.
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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."
U.S. Bank, N.A. 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 U.S. Bank to provide
such services and receive such compensation. U.S. Bank receives fees up to 25%
of each fund's net income from securities lending transactions. For each Fund,
collateral for securities on loan will be invested in a money market fund
administered by FAF Advisors and FAF Advisors will receive an administration fee
equal to 0.02% of such fund's average daily net assets.
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 mortgage pass-through securities, collateralized mortgage
obligations, and commercial mortgage-backed securities, as defined and described
below.
Agency Pass-Through Certificates. Agency Pass-Through Certificates are
mortgage pass-through certificates representing undivided interests in pools of
residential mortgage loans. Distribution of principal and interest on the
mortgage loans underlying an Agency Pass-Through Certificate is an obligation of
or guaranteed by the Government National Mortgage Association (GNMA, or Ginnie
Mae), the Federal National Mortgage Association (FNMA, or Fannie Mae) or the
Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). 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 (as described further below) 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 40 years and generally 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.
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Private mortgage pass-through securities ("Private Pass-Throughs").
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 fixed or adjustable
rate 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.
Collateralized Mortgage Obligations ("CMOs"). 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. A Fund will invest only in CMOs that are rated within
the rating categories in which the Fund is otherwise allowed to invest 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
14
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 Bond
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.
Commercial Mortgage-Backed Securities. Commercial mortgage-backed
securities include securities that reflect an interest in, and are secured by,
mortgage loans on commercial property, such as hotels, office buildings, retail
stores, hospitals, and other commercial buildings. These securities may have a
lower prepayment uncertainty than other mortgage-backed securities because
commercial mortgage loans generally prohibit or impose penalties on prepayments
of principal. In addition, commercial mortgage-backed securities often are
structured with some form of credit enhancement to protect against potential
losses on the underlying mortgage loans. Many of the risks of investing in
commercial mortgage-backed securities reflect the risks of investing in the real
estate securing the underlying mortgage loans. These risks reflect the effects
of local and other economic conditions on real estate markets, the ability of
tenants to make loan payments, and the ability of a property to attract and
retain tenants. Commercial mortgage-backed securities may be less liquid and may
exhibit greater price volatility than other types of mortgage-backed securities.
Adjustable Rate Mortgage Securities ("ARMS"). The Bond Funds, other
than Intermediate Government Bond Fund, may invest in 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.
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.
15
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. The Tax Free Funds may invest in refunded 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 sufficient for paying the bondholders. 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 1% to 3% 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. The 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. The 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 and Certificates of Participation. The Tax Free Funds
also may purchase municipal lease obligations, primarily through certificates of
participation (or "participation interests"). 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
16
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.
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 above 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 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 above 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.
17
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.
18
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.
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.
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.
REAL ESTATE INVESTMENT TRUST ("REIT") SECURITIES
High Income Bond Fund may invest in securities of real estate
investment trusts as a non-principal investment strategy. REITs are publicly
traded corporations or trusts that specialize in acquiring, holding, and
managing residential, commercial or industrial real estate. A REIT is not taxed
at the entity level on income distributed to its shareholders or unitholders if
it distributes to shareholders or unitholders at least 90% of its taxable income
for each taxable year and complies with regulatory requirements relating to its
organization, ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains on
real estate appreciation which are realized through property sales. A Mortgage
REIT invests the majority of its assets in real estate mortgage loans and
services its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT.
19
The Fund's investment in the real estate industry subjects the Fund to
risks associated with that industry. The real estate industry has been subject
to substantial fluctuations and declines on a local, regional and national basis
in the past and may continue to be in the future. Real property values and
income from real property may decline due to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, changes in zoning laws, casualty or condemnation losses,
regulatory limitations on rents, changes in neighborhoods and in demographics,
increases in market interest rates, or other factors. Factors such as these may
adversely affect companies which own and operate real estate directly, companies
which lend to such companies, and companies which service the real estate
industry.
The Fund is also subject to risks associated with direct investments
in REITs. Equity REITs will be affected by changes in the values of and income
from the properties they own, while Mortgage REITs may be affected by the credit
quality of the mortgage loans they hold. In addition, REITs are dependent on
specialized management skills and on their ability to generate cash flow for
operating purposes and to make distributions to shareholders or unitholders.
REITs may have limited diversification and are subject to risks associated with
obtaining financing for real property, as well as to the risk of
self-liquidation. REITs also can be adversely affected by their failure to
qualify for tax-free pass-through treatment of their income under the Code or
their failure to maintain an exemption from registration under the 1940 Act. By
investing in REITs indirectly through the Fund, a shareholder bears not only a
proportionate share of the expenses of the Fund, but also may indirectly bear
similar expenses of some of the REITs in which it invests.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements as a non-principal
investment strategy. Ordinarily, a Fund does not expect its investment in
repurchase agreements to exceed 10% of its total assets. However, because each
Fund may invest without limit in cash and short-term securities for temporary
defensive purposes, there is no limit on each Fund's ability to invest in
repurchase agreements. A repurchase agreement involves the purchase by a Fund of
securities with the agreement that after a stated period of time, the original
seller will buy back the same securities ("collateral") at a predetermined price
or yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. If the original seller defaults on its obligation to
repurchase as a result of its bankruptcy or otherwise, the purchasing Fund will
seek to sell the collateral, which could involve costs or delays. Although
collateral (which may consist of any fixed income security which is an eligible
investment for the Fund entering into the repurchase agreement) will at all
times be maintained in an amount equal to the repurchase price under the
agreement (including accrued interest), a Fund would suffer a loss if the
proceeds from the sale of the collateral were less than the agreed-upon
repurchase price. The Advisor 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).
ROYALTY TRUSTS
Each of the Bond Funds may invest in publicly-traded royalty trusts as
a non-principal investment strategy. Royalty trusts are income-oriented equity
investments that indirectly, through the ownership of trust units, provide
investors (called "unit holders") with exposure to energy sector assets such as
coal, oil and natural gas. A royalty trust receives royalty income from the
production of a natural resource and then distributes this income to unit
holders less deductions for management fees and capital expenses. The trusts
have no physical operations of their own and have no management or employees;
rather, they are merely financing vehicles. Other companies mine the resources
and pay royalties on those resources to the trust.
The level of royalty income the trust receives is subject to swings in
commodity prices and production levels, which can cause distributions of royalty
income to be very inconsistent. Commodity prices can fluctuate widely on a
month-to-month basis in response to a variety of factors that are beyond the
control of the trust, including political conditions in a major commodity
producing region, especially the Middle East in the case of crude oil, worldwide
economic conditions, weather conditions, the supply and price of domestic and
foreign energy resources, the level of consumer demand, the price and
availability of alternative energy resources, the proximity to, and capacity of,
20
transportation facilities, the effect of worldwide energy conservation measures,
and the nature and extent of governmental regulation and taxation. When prices
decline, the trust is affected in two ways. First, net royalties are reduced.
Second, exploration and development activity on the underlying properties may
decline as some projects may become uneconomic and are either delayed or
eliminated. It is impossible to predict future crude oil and natural gas price
movements, and this reduces the predictability of future cash distributions to
unit holders.
The assets of the trust are depleting assets and, if the operators
developing the underlying properties do not perform additional development
projects, the assets may deplete faster than expected. In some cases, operators
may sacrifice opportunities to reinvest in the business in order to maintain or
increase the level of royalty income passed onto the trust. Eventually, the
assets of the trust will cease to produce in commercial quantities and the trust
will cease to receive royalties. There is no guarantee that distributions made
to a unit holder over the life of these depleting assets will equal or exceed
the purchase price paid by the unit holder. If the business starts to lose
money, the trust can reduce or even eliminate distributions.
Trust unit holders generally have limited or no voting rights and
limited ability to enforce the trust's rights against the current or future
operators developing the underlying properties. For example, there is no
requirement for annual meetings of trust unit holders or for an annual election
of the trustee(s). In some cases, the limited liability of unit holders is also
uncertain. The unit holders are not protected from the liabilities of the trust
to the same extent that a shareholder would be protected from a corporation's
liabilities, and could theoretically have unlimited liability for the actions of
the trust.
Royalty trusts are structured to avoid taxes at the entity level. In a
traditional corporate tax structure, net income is taxed at the corporate level
and again as dividends in the hands of the unit holder. An income trust, if
properly structured, should not be subject to U.S Federal income tax. This
flow-through structure means that the distributions to unit holders are
generally higher than dividends from an equivalent corporate entity. Each unit
holder is taxable on this pro rata share of the trust's net income.
Distributions from U.S. royalty trusts are considered ordinary income to the
holder and are taxed accordingly. Due to the depleting nature of oil and gas
assets, a depletion deduction is available to unit holders to defer taxes on
royalty income, enhancing the taxable equivalent yield. The flow-through tax
structure of royalty trusts could be challenged under existing laws, or the tax
laws could change.
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 commercial paper and variable amount
master demand notes; U.S. dollar-denominated time and savings deposits
(including certificates of deposit); bankers' acceptances; obligations of the
U.S. 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 U.S. dollar-denominated obligations. The
other mutual funds in which the Funds may so invest include money market funds
advised by the Advisor.
Each of the Funds may also invest in Eurodollar certificates of
deposit issued by foreign branches of U.S. or foreign banks; Eurodollar time
deposits, which are U.S. dollar-denominated deposits in foreign branches of U.S.
or foreign banks; and Yankee certificates of deposit, which are U.S.
dollar-denominated certificates of deposit issued by U.S. 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 SEC 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
21
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.
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
22
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.
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 U.S.
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 U.S.
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.
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
23
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.
U.S. GOVERNMENT SECURITIES
The Bond Funds, other than High Income Bond Fund, invest in U.S.
government securities as a principal investment strategy. High Income Bond Fund
and the Tax Free 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" above for a description
of these securities and the Funds that may invest in them.
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.
24
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").
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. The current global credit crisis, difficulties in the real estate
market and signs of global recession have eroded confidence on Wall Street and
among consumers. Considerable risks remain for the national economy, including
the threat of further U.S. involvement in wars abroad and additional threats of
terrorism in the U.S. 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. The population of Arizona in 2007 was approximately 6.3
million, ranking 16th in the nation. The State is divided into 15 counties. Two
of these counties, Maricopa County (including Phoenix) and Pima County
(including Tucson), are more urban in nature and account for approximately 75%
of total population and 80% of total wage and salary employment in Arizona,
based on 2000 estimates. 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's gross domestic product ("GDP") was $247 billion in 2007,
making Arizona the 17th largest state economy. Arizona's average annual growth
rate ranked 10th in the U.S. for the period from 2000 through 2006. As growth in
the mining and agricultural 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. In 2007, the
fastest growing industry in Arizona was natural resources and mining, while
there was a decline within the construction industry after several years of
growth. Many of the State's export industries -- those that bring money into the
region from outside --are tied to business spending. 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. 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. In addition, the State's dependence on the hospitality and
construction industries exposes its economy to shocks in consumer confidence.
25
Arizona's seasonally adjusted unemployment rate was 5.9% in September
2008, up 55% from the historical low of 3.8% in September 2007. The U.S.
seasonally adjusted unemployment rate for September 2008 was 6.1%, up 30% from
the rate of 4.7% in September 2008. In its October 2008 report, the Arizona
Department of Commerce Research Administration's (ADCRA's) updated forecast
projects a continued loss of nonfarm jobs for the 2008-2009 forecast period with
a decrease of more than 47,000 jobs (or 1.8%). ADCRA projects that the Arizona
recovery will be delayed until late 2009 and early 2010 because of higher
commodity prices, especially for food and energy, stagnant incomes and the
effects of the crisis in finance and housing. Stagnant incomes and rising prices
have reduced the real spending power of the consumer and damaged the industries
dependent on consumer spending such as trade, transportation, leisure and
hospitality. Indicators of the continued downturn in the housing market include
rising rates of mortgage foreclosures, declining sales of new and existing
homes, higher inventories of unsold houses, falling housing starts and a
continued decline in home prices. The reduction of credit availability as a
result of widening financial market instability has served to compound the
downturn in housing by increasing the difficulty in securing home loans for many
buyers. As a result of tighter credit, less money is available to make loans not
only for houses, but also other consumer and business purchases. Because of this
reduced spending, firms are expected to decrease output and employment.
Unfortunately, the current financial crisis has spread to other parts of the
world and is contributing to the slowdown in global economic growth. Besides
financial turbulence, higher commodity prices (especially for food and energy)
have also contributed to a global economic slowdown. ADCRA's updated forecast
projects a greater loss of nonfarm employment (-47,000 jobs or -1.8%) in
2008-2009 compared to its previous forecast released in May 2008 (-9,200 jobs,
or -0.3%) because of a loss in business and consumer confidence. Higher food and
energy prices, falling home values, stagnant incomes and contracting credit have
all combined to erode business and consumer confidence.
The General Fund budget for the State for each fiscal year ("FY") is
required by law to be balanced, with planned expenditures being no higher than
anticipated revenues and other available funds. In Arizona, on average, around
88% 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% even
in robust years. Since most of the State's tax revenues come from volatile
sources - sales and individual income taxes - the result is often fiscal stress
during times of recession. Revenue collections have shown weakness during FY
2008, as employment deteriorates and consumers continue to hold back, evidenced
by July-August 2008 collections falling more than $100 million below the enacted
forecast. In October 2008, at Governor Janet Napolitano's direction, the
Governor's Office of Strategic Planning and Budgeting ("OSPB") prepared three
Budget Management Plan scenarios, covering a range of FY 2009 revenues. These
plans have been developed to ensure the FY 2009 budget remains in balance. The
policies used to achieve this plan state that the integral functions of State
government must not be compromised; recommended spending reductions will be on
an agency-by-agency and program-by-program basis, not across-the-board; all
voter-protected and constitutionally created programs will be exempt from
spending reductions; and appropriate application of previously used and accepted
budgetary practices will be employed. The Budget Management Plan consists of
four elements: a State agency budget savings strategy, which will reduce State
General Fund expenditures by $75 million to $250 million in FY 2009; use of the
Budget Stabilization Fund ("Rainy Day Fund"), with approximately $120 million
available in FY 2009; fund transfers of approximately $50 million from balances
of other funds to the General Fund; and additional FY 2009 Budget Management
Options, which are expected to generate between $75 million and $380 million
toward balancing the General Fund.
In 1990 the State legislature enacted the formula-based Rainy Day Fund
into which deposits are required to be made during years of "above-trend"
economic growth, for use in "below-trend" periods. It is, in essence, the
state's savings account. In prior years, the Rainy Day Fund has been tapped for
uses not originally intended by the statute. For example, funds from the Rainy
Day Fund were used to pay for the Arizona State Hospital in FY 2000-FY 2003. In
FY 2001-FY 2007, Rainy Day funds were transferred for payments on the
Alternative Fuels Tax Credit. After these outlays, the Rainy Day Fund was
entirely replenished by FY 2008. Funds from the Rainy Day Fund were used to help
with the FY 2008 budget shortfall when the economy started turning down. The
cash balance in the Rainy Day Fund as of August 30, 2008 was $201 million, and
approximately $80 million is estimated to be used to balance the FY 2008
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budget. The Governor's proposal is to transfer $120 million to the General Fund
to help balance the FY 2009 budget, utilizing the Rainy Day Fund for its
intended purpose.
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 renewal 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.
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. There are
two separate tax systems: a Primary system for taxes levied to pay current
operation and maintenance expenses; and a Secondary system for taxes levied to
pay principal and interest on bonded indebtedness, special district assessments
and tax overrides. There are specific provisions under each system governing
property value, the basis of assessment and maximum annual tax levies.
Under the Primary system, property value is the basis for determining
primary property taxes of locally assessed real property and may increase by
more than 10% per year only under certain circumstances. Under the Secondary
system, there is no limitation on annual increases in full cash value of any
property. 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%
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% over the prior year's
levy, plus any amount directly attributable to new construction and annexation
and involuntary tort judgments. The 2% 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.
In June 2006, Governor Napolitano signed State legislation to freeze local
property tax assessments at the 2005 level, with annual increases limited to 2%
plus the value of new construction. It is possible that if other such proposals
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 FY 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. A
1992 amendment to the Constitution of Arizona states 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,
then the legislation may not become effective unless the legislation 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
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budgets enacted since FY 1993-94 have not provided for any increases in State
revenues that required an approval from two-thirds of the State Legislature.
As of July 2008, Arizona was assigned an issuer credit rating of "AA"
by Standard & Poor's and "Aa3" by Moody's. Any explanation concerning the
significance of such ratings must be obtained from the rating agencies. There
can be no assurance that such ratings will be maintained in the future. It
should be noted that the creditworthiness of obligations issued by local Arizona
issuers may be unrelated to the creditworthiness of obligations issued by the
State of Arizona, and that there is no obligation on the part of the State to
make payment on such local obligations in the event of default.
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 U.S. and one of the largest in the world, having a gross domestic product
("GDP") of over $1.8 trillion in 2007. California accounts for slightly over 13%
of the nation's output. The nation's next largest state economy--Texas--is about
62% the size of California's economy. The State's population of over 36.5
million has more than doubled since 1960 and now constitutes about 12% of the
U.S. total.
In its October 2008 Finance Bulletin, the State of California Finance
Department reported that the ongoing housing and financial crises continued to
roil the California economy through August 2008. The state lost payroll jobs for
the sixth consecutive month in August, and the unemployment rate rose again.
Home building slowed, but home sales had stabilized. The State lost jobs in
seven out of the first eight months of 2008. Since nonfarm employment peaked in
July 2007, the state has lost 83,700 jobs, or 6,440 per month on average.
California's unemployment rate rose to 7.7% in August, up from a revised 7.4% in
July, and up from 5.5% a year earlier. The 2.2% increase from August 2007 to
August 2008 was the largest year-over-year increase since July 1991. However, as
much as a third of that jump may have been due to the U.S. Bureau of Labor
Statistics' practice--adopted in January 2005--of adjusting state unemployment
estimates so that they add up to the national estimate. This "benchmarking" of
states' unemployment estimates has resulted in a huge increase in the
variability of California's unemployment statistics. Home building slowed
considerably in August, with slowdowns in both single and multi-family home
building. Residential permits were issued at a seasonally adjusted annual rate
of 55,645 units, down over 56.2% from a year earlier. Single-family permits were
down 55.0%, while multi-family permitting was down 57.4%. New home permitting
during the first eight months of 2008 was down 43.8% from the same months of
2007 and down 60% from the same period of 2006. Nonresidential construction also
slowed in August. Nonresidential construction permitting was down 21.9% in
August from a year earlier. For the first eight months of 2008 as a whole,
nonresidential permitting was down 5.5% from the same months of 2007. In August,
California real estate markets basically moved sideways. Existing home sales and
home prices were essentially unchanged from July. Sales of existing
single-family detached homes totaled 490,850 units at a seasonally adjusted
annualized rate, according to the California Association of Realtors.
Inventories remained elevated--although much better than at the beginning of the
year. The Association's unsold inventory index stood at 6.7 months in August for
the second consecutive month. The median price of existing, single-family homes
sold in August was $350,140, essentially unchanged from July, but down 40.5%
from August 2007.
The State's principal sources of General Fund revenues are the
California personal income tax, sales tax, and bank and corporate taxes. The
weakening State economy in 2007 and 2008, which is projected to continue in
2009, has resulted in significant reductions in State tax revenues below earlier
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projections, creating an estimated budget gap of $15 billion that will need to
be addressed in FY 2008-09. To balance the budget, Governor Schwarzenegger has
proposed significant expenditure cuts in State programs and other one-time
actions. The most significant of these actions is a proposal to securitize
future receipts from the State Lottery, which, combined with a new budget
stabilization procedure described below, would add $5.1 billion to FY 2008-09
revenues. Both of these actions will require voter approval at the November 2008
election. In addition, the State faces pressure on its cash management program
and expects to have to access external markets for cash management borrowings
commencing in the first quarter of FY 2008-09.
The FY 2008-09 Budget Act (the "2008 Budget Act") was adopted by the
Legislature on September 18, 2008, along with a number of implementing measures,
and signed by the Governor on September 23, 2008. In approving the 2008 Budget
Act the Governor vetoed $850 million in General Fund appropriations). General
Fund revenues and transfers for FY 2008-09 are projected at $103.0 billion, an
increase of $1.8 billion or 1.8% compared with revised estimates for FY 2007-08.
General Fund expenditures for FY 2008-09 are projected at $103.4 billion, a
decrease of $0.1 billion from the $103.3 billion for 2007-08. The 2008 Budget
Act projects to end FY 2008-09 with a $1.7 billion total reserve. As part of the
2008 Budget Act, the Legislature approved a constitutional amendment to be
placed on the next statewide ballot after November 2008 that would mandate at
least 3% to 12.5% of General Fund revenues each year to be sequestered into the
Budget Stabilization Account ("BSA"), unless the BSA is full or moneys are being
accessed in a deficit year. In addition to the annual transfer, in years that
revenues are above 5% of the amounts included in the budget act for that fiscal
year would be required to be transferred. Under normal circumstances, the State
would set aside $1.509 billion for FY 2008-09 in the BSA for rainy day purposes.
On May 28, 2008, the Governor issued an Executive Order which officially
suspends the BSA transfer for FY 2008-09. The 2008 Budget Act reflects the
suspension of this transfer to the BSA for FY 2008-09. The 2008 Budget Act also
includes legislation that, if approved by the voters of the State, authorizes
the California State Lottery to adopt changes to improve its financial
performance. The 2008 Budget Act is proposing to securitize future lottery
revenues to fund a newly created Debt Retirement Fund, with the first $5.0
billion in securitization revenues to be available in FY 2009-10. The 2008
Budget Act has several other major General Fund components, including tax law
changes, and additional funding for K-12 education, higher education, health and
human services, and transportation.
As of July 2008, California maintained an issuer credit rating of "A+"
by both Standard & Poor's and Fitch, and "A1" by Moody's. There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
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 (according to value) taxes on real property and
restricts the ability of taxing entities to increase real property taxes and
assessments, and limits the ability of local governments to raise other taxes.
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. 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% 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.
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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.
To close certain loopholes in previously passed Propositions,
California voters approved Proposition 218 in November 1996. 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. 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. It
is unclear how this right of local initiative may be used in cases where taxes
or charges have been or will be specifically pledged to secure debt issues. The
interpretation and application of Proposition 218 will ultimately be determined
by the courts with respect to a number of matters, and it is not possible at
this time to predict with certainty the outcome of such cases. Due to
limitations like Propositions 13 and 218, obligations of the State or local
governments may be affected by the ability of the State to raise revenue.
Article XIII B of the California Constitution (the "Appropriation
Limit") imposes a limit on annual appropriations from tax proceeds. Originally
adopted in 1979, Article XIII B was modified by Proposition 98 in 1988 and
Proposition 111 in 1990. Excluded from the Appropriation Limits are prior (pre
1979) debt service and subsequent debt incurred as the result of voter
authorizations, court mandates, qualified capital outlay projects and certain
increases in gasoline taxes and motor vehicle weight fees. Certain civil
disturbance emergencies declared by the Governor and appropriations approved by
a two-thirds vote of the legislature are excluded from the determination of
excess appropriations, and the appropriations limit may be overridden by local
voter approval for up to a four-year period. On November 8, 1988, California
voters approved Proposition 98, a combined initiative constitutional amendment
and statute called "the Classroom Instruction Improvement and Accountability
Act." This amendment changed school funding below the University level by
guaranteeing K-14 schools a minimum share of General Fund Revenues. Suspension
of the Proposition 98 funding formula requires a two-thirds vote of Legislature
and the Governor's concurrence. Proposition 98 also contains provisions
transferring certain funds in excess of the Article XIII B limit to K-14
schools. As amended by Proposition 111, the Appropriation Limit recalculated
annually by taking the actual FY1986-1987 limit and applying the Proposition 111
cost of living and population adjustments as if that limit had been in effect.
The Appropriations Limit is tested over consecutive two-year periods under this
amendment. Any excess "proceeds of taxes" received over such two-year period
above the Appropriation Limits for the two-year period is divided equally
between transfers to K-14 and taxpayers.
In March 2004, California voters approved two measures designed to
address the cumulative budget deficit and to implement structural reform. Under
the California Economic Recovery Bond Act (Proposition 57), the State is
authorized to issue up to $15 billion of economic recovery bonds (of which $10.9
billion have been issued as of October 2006 to finance the negative General Fund
reserve as of June 30, 2004, and other General Fund obligations undertaken prior
to June 30, 2004. The Balanced Budget Amendment (Proposition 58), discussed
above, restricts future long-term deficit financing and requires the State to
adopt and maintain a balanced budget and to establish a reserve fund.
In November 2006, voters approved Proposition 1A, which had been
placed on the ballot by the Legislature as Senate Constitutional Amendment No.
7, to protect Proposition 42 transportation funds from any further suspensions.
Current provisions of the State Constitution enacted as Proposition 42 in 2002,
permit the suspension of the annual transfer of motor vehicle fuel sales tax
revenues from the General Fund to the Transportation Investment Fund if the
Governor declares that the transfer will result in a "significant negative
fiscal impact" on the General Fund and the Legislature agrees with a two-thirds
vote of each
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house. The new measure modifies the constitutional provisions of Proposition 42
in a manner similar to Proposition 1A of 2004, so that if such a suspension
occurs, the amount owed by the General Fund must be repaid to the Transportation
Investment Fund within three years, and only two such suspensions can be made
within any ten-year period. In FY 2003-04, the scheduled Proposition 42 transfer
of $868 million was suspended, and in FY 2004-05 the full transfer of $1.258
billion was suspended. The Proposition 42 transfer was fully funded in FY
2005-06 at $1.359 billion. The 2006 Budget Act fully funded the Proposition 42
transfer at $1.415 billion for FY 2006-07, and also included $1.415 ($1.215
billion from the General Fund) for advance repayment of a portion of the FY
2003-04 and FY 2004-05 suspensions. The 2007 Budget Act fully funded the
Proposition 42 transfer at $1.439 billion and the required repayment for
remaining Proposition 42 debts at $83 million for FY 2007-08. The 2008 Budget
Act fully funds the Proposition 42 transfer for FY 2008-09 at $1.432 billion
with another $83 million to repay a portion of past suspensions.
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.
There are numerous civil actions pending against the State, which
could, if decided against the State, require the State to make significant
future expenditures and may substantially impair revenues and cash flow. It is
not possible to predict what impact, if any, such proceedings may have on the
California Tax Free Fund and California Intermediate Tax Free Fund.
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 several 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
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four major metropolitan areas: Denver/Boulder, Colorado Springs, Fort
Collins/Greeley and Pueblo. The population of Colorado in 2007 was 4.8 million,
ranking 22nd in the nation. 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. Colorado's gross domestic product ("GDP") was $236 billion in 2007,
making Colorado the 20th largest state economy. 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's economy continues to show that it is more resilient and
perhaps better poised to rebound from the current national financial turmoil
than the national economy. By comparison, Colorado is experiencing lower
unemployment, greater job growth, and lower inflation than the nation overall,
and is supportive of Colorado's focus on booming industries like renewable and
non-renewable energy, biosciences, and technology. While there is still a
significant amount of uncertainty surrounding the recent problems in the
financial industry, and the federal bailout of governmental sponsored
enterprises Freddie Mac and Fannie Mae, the current circumstances appear to have
affected Colorado far less than other states, for several reasons. First, in
general, wholesale and retail energy prices have been on the decline since early
July. Second, crude oil prices have made renewable energy producers more
economically competitive. The cluster of major research universities and federal
laboratories in the State along with the State's efforts to attract the
renewable energy industry to Colorado have resulted in the State becoming a
magnet for private-sector ventures in renewable energy. It appears this sector
will lead the way for economic growth in Colorado for the foreseeable future.
Third, although certain parts of the State remain distressed by foreclosures,
the current state of the residential real estate market is substantially
stronger in Colorado than the rest of the country. According to the Standard &
Poor's / Case-Shiller index, Denver's real estate market is one of the strongest
of any major metropolitan area of the country. In the most recent data
available, the price index for Denver posted a one-month increase of 1.5% in
June. Compared to June 2007, home prices in Denver are down 5%. However, this is
the mildest decrease of any large metropolitan area except Dallas, Texas. Real
estate also continues to be strong on the Western Slope, in response to the
continuing influx of oil and gas workers.
The September 2008 Revenue Forecast of the Colorado Office of State
Planning and Budgeting ("OSPB") projects that personal income will grow 5.2% in
2008 and 4.4% in 2009. These estimates reflect 0.9% and 1.8% reductions from the
June 2008 forecast and are due primarily to lower wage and salary growth as well
as an unemployment rate that is significantly higher than previously expected.
The Colorado unemployment rate dropped to 3.8% in 2007, its lowest reading since
2000. The general economic slowdown has pulled unemployment rates closer to
historical average rates between 5% and 6%. Due to slowing growth in sectors
that typically hire young persons and seasonal help, the Colorado unemployment
rate is projected to reach an average of 4.9% for calendar 2008, where it is
anticipated to remain through 2009, before starting a slow decline. Colorado's
economy cannot be totally insulated from broader economic issues. With the
recent events in the credit markets, there is concern that regardless of
Colorado's focus on immerging industries, there will not be enough access to
capital for these businesses to exceed. It is too early to tell whether the
federal government's capital infusions will be sufficient to stabilize markets
and stimulate the financial system.
Because of limitations in the State Constitution, the State of
Colorado issues no general obligation bonds. Although Colorado has no
outstanding general obligation debt, as of July 2007, Standard & Poor's rates
Colorado lease obligations "AA-" and Moody's rates these obligations "Aaa."
Fitch has 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.
32
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 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 spring 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. The State's General
Fund ended FY 2002-03 with a $224.9 million reserve and FY 2003-04 with a $346.9
million reserve. In FY 2004-05, the State's General Fund ended the year with a
$331.4 million reserve. This reserve exceeded the statutory 4% reserve,
described below, by $94 million. The FY 2005-06 General Fund ended the year with
a $688.5 million reserve, exceeding the statutory 4% reserve by $436.8 million.
The FY 2006-07 General Fund ended the year with a $536.7 million reserve,
exceeding the statutory 4% reserve by $269.7 million. The FY 2007-08 General
Fund ended the year with a $325.4 million reserve, exceeding the statutory 4%
reserve by $41.9 million. According to the OSPB's September 2008 forecast, after
increasing 2.7% in FY 2007-08, gross General Fund revenues are expected to
increase 4.3% in FY 2008-09 and 5.0% in FY 2009-10. Through FY 2008-09, the
State is projected to have enough General Fund revenue to maintain
appropriations growth of 6%. The State is not projected to have excess General
Fund reserves after FY 2007-08.
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 FY 2001-02
and remained absent through FY 2003-04. In FY 2004-05, the TABOR surplus
reappeared after a four-year absence, totaling $44.7 million. Colorado voters in
November 2005 passed Referendum C, which (i) allows the State to keep and spend
revenues above normal TABOR limits for five years and (ii) beginning in 2011,
creates a new State spending cap equal to the greatest amount of money collected
in any fiscal year between 2006 and 2010, adjusted for inflation and population
growth in 2011 and subsequent years. The constitutional spending limit will be
reinstated in 2010, at which point Colorado could begin to see budgetary issues
once again.
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 4% 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 4% (i.e., 2%), 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 3% 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.
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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% of the overall assessed value of property in the State. That means as
home values rise, or new homes are constructed, the 45% cap forces residential
real estate to be assessed at an ever-decreasing rate.
The State's tourism industry is a major component of Colorado's
economic base. It encompasses a cross section of economic sectors, though not
reported as a separate economic sector. Accommodations & food services, along
with recreation services, provide a reasonable indication of tourism activity.
According to a June 2008 report by the Colorado Tourism Office, the number of
visitors to Colorado in 2007 surpassed a 1992 record set shortly before state
funding for advertising was slashed. Though tourism funding was restarted in
2000, it had taken the state nearly eight years to regain the market share that
was lost. The 2007 data shows tourism was up 4% and tourism spending was up 10%
to $9.8 billion from 2006. This marked the fourth consecutive year tourism had
grown in the state. Colorado was 17th in overall market share and first in share
of overnight ski trips in 2007. The state had dropped to 23rd in overall ranking
in 2004.
Finally, Colorado is subject to unpredictable 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. Ample snow would also likely mean
fuller reservoirs and could potentially reduce the chance of severe droughts.
Cycles of drought and flooding are concerns insofar as they affect agricultural
production, power generation, and the supply of drinking water.
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, and food. Historically,
the State's
34
unemployment rate had consistently been less than the national unemployment
rate, but in 2007 Minnesota's unemployment rate for the year was equal to the
U.S. average, and in the first eight months of 2008 Minnesota's unemployment
rate was greater than or equal to the U.S. average in three (February through
April). Since 1980, Minnesota per capita income generally has remained above the
national average. In 2007, Minnesota per capita personal income was 106.3% of
its U.S. counterpart.
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.
The General Fund had a substantial unrestricted surplus of $1.1
billion at the end of the last biennium, June 30, 2007. The Department of
Finance February 2008 Forecast, however, projected a $935 million (2.7%) General
Fund deficit for June 30, 2009, after reducing the projected $68 million
unreserved balance by the statutorily mandated $653 million budget reserve and
$350 million cash flow account. Legislation was enacted to increase revenues by
$206 million, reduce overall spending by $125 million, transfer $110 million of
funds from certain non-general funds, and reduce the budget reserve by $500
million to $153 million. As a result, end of session estimates projected a $6
million unrestricted General Fund balance for June 30, 2009, based on
expenditures of $34.593 billion, after reducing the projected $509 unreserved
balance by the $153 million budget reserve and the $350 million cash flow
account. The Minnesota Council of Economic Advisors has, for some time, urged
the State to increase its budget reserve substantially to 5% of biennial
spending. Planning estimates for the next biennium ending June 30, 2011,
reflecting the legislation, indicated that projected revenues would fall short
of projected expenditures by $946 million, not taking into account any balances
carried forward from the current biennium. While wage and price inflation is
included in revenue planning estimates, State law prohibits using a general
inflation adjustment to project expenditures. A general inflation adjustment of
1.9% each fiscal year would add $1.041 billion to expenditures for the next
biennium. The Department's next official Forecast will not be released until
November, so the information provided above does not reflect the nation's recent
economic difficulties. In its October 2008 Economic Update, the Department of
Finance reported that revenues for the fiscal year ending June 30, 2008 were
substantially greater than previously forecast, and that revenues during the
quarter ending September 30, 2008 also were more than estimated, despite very
weak sales tax collections. But the Update also warned that the State's national
economic consultant has forecast a much weaker economy for the remainder of 2008
and all of 2009 than was reflected in the budget projections discussed above.
Furthermore, the banking, securities and investment, and insurance sectors are
important contributors to the State's economy, reflecting approximately 5.9% of
total employment and an even larger share of wages and salaries.
35
The State is a party to a variety of civil actions that could
adversely and materially 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 Funds or the value or
marketability of such obligations.
Certain Minnesota tax legislation could adversely affect the
tax-exemption, value and marketability of Minnesota municipal bonds held by the
Funds. (Please see the final two paragraphs in "Taxation".) Possible future
changes in federal and State income tax laws, including rate reductions, also
could adversely affect the value and marketability of such bonds.
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, that 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 gross domestic product ("GDP") was over $229
billion in 2007, making Missouri the 22nd largest state economy. Missouri's
economy rests chiefly on industry, with aerospace and transportation equipment
as the main industries. Food products, chemicals, printing and publishing,
machinery, fabricated metals, and electrical equipment are also important. The
development of resorts in the Ozarks, including Branson and several lakes, has
boosted tourism income. St. Louis is an important center for the manufacture of
metals and chemicals. In Kansas City, long a leading market for livestock and
wheat, the manufacture of vending machines and of cars and trucks are leading
industries. 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. Missouri
remains important agriculturally. With over 100,000 farms, the State ranks
second only to Texas. The most valuable farm products are soybeans, corn,
cattle, hogs, wheat, and dairy items. 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. 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 two decades, Missouri
has consistently ranked among the top eight states in total military contract
awards.
36
The June 2008 economic report from the Missouri Economic Research and
Information Center ("MERIC") shows that the end of 2007 and first half of 2008
have been a difficult time for both the U.S. and Missouri economies. The housing
market has not yet stabilized, creating problems across a wide array of
industries. A number of the State's large employers are in the auto industry
(Daimler Chrysler and Ford are the 17th and 19th largest employers,
respectively), which continues to struggle. The Kansas City Ford plant produces
the Ford F150 pickup truck and Chrysler's St. Louis plant produces minivans and
pickup trucks. These operations may face cut backs in production and employment.
In addition, the State has a heavy weighting of jobs in the defense industry,
which could weaken should military spending decline. Rising energy prices are
weighing on consumers and businesses alike. Consumer budgets are feeling the
additional strain of rising food prices. Labor markets are weak, with employment
decreasing in the majority of industries and unemployment rising. According to
U.S. Bureau of Labor Statistics' data, through November 2007, the State gained
12,000 jobs over the previous twelve months, growth of 0.4%, and 87,900 jobs
since January 2005. Between November 2006 and November 2007, 6,200 jobs were
lost in motor vehicle and transportation equipment manufacturing, a reduction of
9.5%. Conversely, the State gained 18,900 private service-producing jobs over
the same period, an increase of 1.0%. Despite this churning in the job market,
on a year-over-year basis, personal income growth during calendar year 2007 is
projected to be 5.4%, which is above average. Missouri's economic outlook over
the next two years is similar to that of the nation, weighed down by the general
outlook in the housing and automotive industries. However, Missouri's exporters
are benefiting from the weak dollar, and continue setting new records for total
exports. Growth will continue in the service sectors. Below average employment
growth of 0.4 to 0.6% is expected annually. Personal income growth will slow to
4.0% in 2008, increasing to 4.3% in 2009. Risks to this outlook include slower
consumer spending as a result of sharply reduced residential investment activity
and higher energy prices, and further slowdowns in vehicle manufacturing.
The State faces significant challenges related to the expenditure
demands of Medicaid, elementary and secondary education, higher education, and
correctional institutions. From a financial standpoint, Missouri continues to
proactively address its budget concerns and maintains a conservative financial
management policy. The Missouri Constitution limits the amount of taxes that can
be imposed in addition to giving the governor line-item veto power and the
authority to withhold allotments of appropriated funds in the course of a fiscal
year whenever actual revenues are below projections. A constitutional amendment
also requires a reserve fund be maintained at 7.5% of the previous year's net
general revenue collections. It remains fully funded.
General revenue growth below long-term averages is expected in FY
2009. The revised FY 2008 and initial FY 2009 revenue estimates project net
growth of 3.1% and 3.4%, respectively. The revenue base has held up well through
the first half of 2008. Growth in individual income tax receipts is expected to
remain strong. However, consumer spending on taxable items is being dragged down
as consumers consider reducing debt loads and dealing with high energy prices.
Tax changes in the form of income tax relief for seniors and sales tax relief
for manufacturers will slow revenue growth. Another year of substantial tax
credit growth will reduce receipts. General revenues in FY 2009 will be affected
by the slowing in the overall economy. Finally, the continued implementation of
the 2004 transportation ballot initiative, Constitutional Amendment No. 3, will
impact FY 2008 and FY 2009. This will lower general revenue collections by an
estimated $30 million annually.
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.
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% of the previous year's net general revenue
37
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% of total revenues, and for
municipalities, 17%. 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.
Missouri's general obligation debt carries ratings of "Aaa" by Moody's
and "AAA" by Standard & Poor's and Fitch. Missouri is one of only seven states
that has received this rating from all three rating organizations. General
obligation bonds can only be issued through voter-approved amendments to the
State's Constitution.
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, Article X, approved by voters
in November 1980, that limits revenue to the ratio of FY 1980-81 State revenue
to calendar year 1979 State personal income (about 5.6%) 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. Droughts also lead to
38
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 gross domestic product ("GDP") was $80 billion in 2007,
making Nebraska the 36th largest state economy. 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. Data from the
State Department of Labor show Nebraska's total nonfarm employment (not
seasonally adjusted) at 974,336, which is 1.1% more than August 2007. Nebraska's
annual average unemployment rate has been among the lowest in the nation for the
last decade. In August 2008, State labor data showed Nebraska's unemployment
rate (not seasonally adjusted) at 3.2%, compared to 6.1% nationally. The Bureau
of Business Research of the University of Nebraska-Lincoln and the Nebraska
Business Forecast Council remain optimistic on Nebraska's economic future and
have published the following comments about its economy. Aggregate farm income
is expected to grow rapidly in the next two years. Solid broad-based employment
growth, rising proprietor incomes, and strong growth in dividend and interest
incomes will lead to strong overall growth in non-farm personal income. While
housing construction will not fully recover until 2008 or 2009, other components
of the construction industry, such as hospital, health care, hotel and
restaurant construction activity should grow steadily. Nebraska should also
continue to benefit from further decentralization of manufacturing activity away
from the industrial Midwest to areas in Nebraska. Opportunities continue to
improve in the food processing sector and the transportation and warehousing
industries are expected to continue to expand rapidly. Finally, strong growth is
expected in services employment, in areas such as health care and social
assistance.
The General Fund is the chief operating fund of the State. The major
General Fund liability is the estimated tax refunds payable of $291 million.
Such refunds payable are $11 million less than the expected taxes owed the
State. Other assets of the General Fund available to pay non tax-refund
liabilities exceed such liabilities by $961 million. On June 30, 2006, the
General Fund had a positive fund balance of $692 million. While both revenues
and expenditures increased in 2007, revenues again exceeded expenditures which
increased the fund balance $285 million in 2007, which was about equal to the
$289 million increase that occurred in 2006. This operating increase in 2007,
when coupled with the $6 million of net transfers out, caused the General Fund
balance to increase by $279 million, ending with a fund balance of $972 million.
Revenues in 2007 were more than anticipated and were up $131 million over 2006
chiefly due to (1) an increase in income tax revenue of $58 million (a 3%
increase) over 2006 and (2) increased investment income of $57 million due to
more funds being invested at higher interest rates. Sales taxes from increased
retail sales were up 1.5% over last year. Expenditures were less than budgeted
due to continued efforts by agency heads to be conservative in spending.
To compensate for any downturns in revenues, the State has maintained
a budgetary basis Cash Reserve Fund. While this Cash Reserve Fund is commingled
with General Fund cash in the General Fund financial statements, it is separate
and distinct in that, by State statute, it can only be used (1) when the cash
balance of the General Fund is insufficient to meet General Fund current
obligations and (2) for legislatively mandated transfers to other funds. Any
money transferred in accordance with item one above must be repaid as soon as
there is sufficient cash in the General Fund cash account to do so. No such need
existed in 2007. The Cash Reserve Fund was at $177 million at the beginning of
2006. Due to the fact that 2005 revenues exceeded the forecast, a statutory
requirement caused a $262 million transfer from the General Fund cash account to
the Cash Reserve Fund in fiscal year 2006 in July 2005. Offsetting this large
transfer was a $146 million payment made on August 1, 2005 from the Cash Reserve
Fund to settle a lawsuit against the State related to a low-level radioactive
waste site. There were also other transfers out of the Fund of $19 million,
leaving a Cash Reserve Fund balance at June 30, 2006 of $274 million. The
statutory transfer for excess receipts for FY 2006 of $260 million was made in
July, 2006. There were transfers out of the reserve of $18 million, leaving a
balance of $516 million at June 30, 2007.
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.
39
General obligation bonds of the State maintain an "AA+" rating from
Standard and Poor's, as of July 2008. There can be no assurance that such
ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local Nebraska issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Nebraska, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
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 gross domestic product ("GDP") was $466 billion in 2007,
making Ohio the 7th largest state economy. Ohio ranks third in the nation in
manufacturing, with a concentration of both durable and non-durable goods
production, especially transportation equipment (mostly cars, trucks and their
parts), primary metals (principally iron and steel), fabricated metal products,
non-metallic mineral products, electrical equipment and appliances, machinery,
and plastic and rubber products. As a result of Ohio's reliance on
manufacturing, the State's 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. Economic activity in and around Ohio has
been sluggish. Ohio's seasonally adjusted unemployment rate was 7.2% in
September 2008, up from 5.9% in September 2007. The U.S. seasonally adjusted
unemployment rate for September 2008 was 6.1%. Total employment in Ohio is
expected to increase 7.3% over the 10-year period from 2004-2014. Personal
income in Ohio grew at 4.7% in 2007. The State is projecting slow growth through
2008 with a 1.9% increase in personal income. Industrial and construction
activity deteriorated in Ohio and across the country over the course of the
summer in 2008. Real consumer income and spending probably declined during the
third quarter of 2008 and is expected to decline further during the fourth
quarter.
Although manufacturing remains the largest single major sector in
Ohio, the service-producing sectors now produce a combined 76% of the State's
GDP and are expected to account for virtually all job growth over the 2004-2014
period. Service sectors concentrated in Ohio include the management of companies
and enterprises and, to a lesser extent, the provision of health care and social
assistance.
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, 2007 and will end
June 30, 2009. Most State operations are financed through the general revenue
fund ("GRF"). Personal income and sales use taxes are the major GRF sources.
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. The Ohio constitution prohibits the State from borrowing money to fund
operating expenditures in the GRF. Therefore, by law, the GRF's budget must be
balanced so that appropriations do not exceed available cash receipts and cash
balances for the current fiscal year. 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 up to 5% of the GRF revenue for the
preceding fiscal year.
Fiscal Year ("FY") 2008 GRF tax revenues were $31.8 million below
original estimates. Total expenditures in FY 2008 totaled $26.4 billion, which
was 1.9% above FY 2007 levels, but 2.4% below original forecast. As of the end
of FY 2008 (June 30, 2008), the State had a GRF budgetary fund balance of $807.5
million, up from the $215.5 million fund balance at the end of FY 2007. With the
State's economy expected to be negatively affected by the national economic
downturn, the Ohio Office of Budget and
40
Management ("OBM") has been closely monitoring the State's major revenue sources
(especially the sales, personal and corporate income taxes) and in January 2008
reduced its original GRF revenue projections by $172.6 million for FY 2008 and
$385.1 for FY 2009. Based on those lower GRF revenue estimates and increased
costs associated with rising Medicaid caseloads, OBM projected a budgetary
shortfall for the current biennium (June 30, 2009) of $733 million. In response,
on January 31, 2008, Governor Ted Strickland issued an executive order directing
expenditure reductions and spending controls totaling approximately $509.1
million for the biennium as well as limitations on major purchases, hiring and
travel. An employee reduction plan was also announced aimed at reducing the
State's workforce by up to 2,700 through attrition, unfilled vacancies and an
early retirement incentive program. Expressly excluded from the cutbacks are
appropriations for or relating to debt service on State obligations, State
higher education instructional support, foundation formula support for primary
and secondary education, Medicaid entitlement programs, and ad valorem property
tax relief payments. The General Assembly has also identified the following
measures including (i) various transfers totaling $183 million, including
unspent agency appropriations; (ii) cancelling cost of living adjustments for
certain exempt State employees; and (iii) authorizing expansion of the State-run
lottery system to include "keno" games. Based on the expenditure reductions,
spending controls and other measures identified above, OBM is currently
projecting a positive GRF fund balance at the end of the current biennium. The
State's Constitution precludes the State from ending a fiscal year or biennium
in a "deficit" position. The Governor and OBM will continue to closely monitor
revenues and expenditures and work with the General Assembly to ensure these
positive GRF ending fund balances.
Most capital improvements in Ohio are funded through the issuance of
debt. The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by the State Constitution. Currently,
tax supported general obligation debt of the State is authorized to be incurred
for the following purposes: highways, local infrastructure, coal development,
natural resources, higher education, common schools, conservation, research and
development, and site development. State special obligation debt is authorized
by the State Constitution for certain specified purposes. This debt is not
supported by excises or taxes levied by the General Assembly. Rather, debt
service payments are subject to biennial appropriations (from the GRF, with
certain exceptions) by the General Assembly pursuant to leases or agreements
entered into by the State. 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, and except for the additional $650,000,000 of general
obligation debt approved by voters at the November 8, 2005 election for research
and development and the development of sites and facilities, 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% of the total estimated GRF
revenues plus net State lottery proceeds during the fiscal year of issuance.
Direct obligations of the State subject to the debt service cap include general
obligation and special obligation bonds that are paid from the State's GRF, but
exclude general obligation bonds payable from non-GRF funds (such as highway
bonds that are paid from highway user receipts). Application of the 5% cap may
be waived in a particular instance by a three-fifths vote of each house of the
Ohio General Assembly.
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 described above. Ohio's general obligation debt is rated "Aa1" by
Moody's and "AA+" by Fitch. There can be no assurance that such ratings will be
maintained in the future. It should be noted that the creditworthiness of
obligations issued by local Ohio issuers may be unrelated to the
creditworthiness of obligations issued by the State of Ohio, and that there is
no obligation on the part of the State to make payment on such local obligations
in the event of default.
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
41
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. Oregon has a diverse economic base with significant components
in timber and other natural resources, construction, high technology,
manufacturing, trade and tourism. Oregon's gross domestic product ("GDP") was
$158 billion in 2007, making Oregon the 26th largest state economy. According to
the September 2008 data from the Oregon Office of Economic Analysis ("OEA"), the
second quarter of 2008 would have been the 20th consecutive quarter of rising
employment in the State. This five-year pace was cut short one quarter with a
seasonally adjusted job decline of 1.7%. Except for the 1.6% job growth in the
first quarter of 2008, the quarterly job gains have been below 1.0% since the
second quarter of 2007. On a year-over-year basis, jobs increased in the second
quarter by 0.4%. The same areas which have been pressuring the U.S. economy over
the past year are also taking their toll on the Oregon economy. The combined
softening impacts of housing, financial, and energy markets are causing
widespread slowing in job markets. Employment sectors that lost jobs in the
second quarter include construction, manufacturing, retail trade, information,
financial activities, and leisure and hospitality. Although the job losses are
spread across many sectors, private education and health services had strong job
gains. OEA forecasts a decline of 0.7% in total employment in third quarter 2008
and further declines of 0.9% in the fourth quarter of 2008. The first quarter of
2009 will still be anemic with growth of 0.4%. The Oregon economy is not
forecasted to recover until the latter part of 2009.
The OEA's September 2008 forecast for General Fund revenues for the
2007-09 biennium is $12.9 billion, a decrease of $119.2 million from the June
2008 forecast. The relatively small decrease (approximately 1%) is the result of
the expectation of the current economic slowdown extending well into 2009,
rather than turning around earlier in the year. The projected ending balance for
2007-09 equals $23.8 million, $119.2 million below the June 2008 forecast. Total
General Fund revenues are forecasted to increase 19.9% to $15.5 billion in the
2009-11.
Like other segments of Oregon's economy, geography and natural
resources have played a role in the development of the State's international
activities. The majority of the State's international trade occurs through the
Port of Portland, where an efficient system for dealing with a large number of
vessels has been developed, including modern grain elevators, cranes, break-bulk
and containerized cargo facilities, and ship repair and dry-dock facilities.
Other important ports are located at the coastal cities of Astoria, Newport and
Coos Bay. The State has a total of 23 port districts, all of which are located
on navigable waterways.
Oregon natural resources attract millions of visitors each year.
Nearly four hundred miles of the Oregon Coast define its western border, where
all the beaches are public by statute. With nine climate regions, Oregon offers
a variety of environments from rain forest to high desert, and plateau to
dormant volcanic ranges topped with glacier-covered peaks. As Oregon's economy
continues to diversify, tourism plays a vital role in creating new job
opportunities and strengthening local and regional revenues. In 2007, an
estimated $8.3 billion was generated in Oregon by travel spending, a 5.2%
increase over 2005 spending.
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 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 made a
constitutional requirement by voters at the November 2000 General Election. 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%, a tax credit for corporations or a tax refund for
individuals is extended to all taxpayers in that category (also known as the
42
"2% 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 personal tax refund has been triggered eight times since 1981 and
was last triggered for during the 2005-2007 biennium. The corporate tax credit
was last triggered in 2003-05, the sixth time that it has occurred. 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.
Oregon does not have a sales tax. As a result, State tax revenues are
particularly sensitive to economic recessions. The principal source of State tax
revenues are personal income and corporate income taxes. The State derives a
substantial majority of its general fund revenues from its personal income tax
and is, therefore, particularly susceptible to economic changes that affect
personal income levels. Among the risks facing the Oregon economy are:
geopolitical events and domestic economic factors (such as inflation, increased
interest rates or stock market corrections) that could depress business activity
or consumer behavior; changes in the value of the U.S. dollar against foreign
currencies that could lower demand for Oregon products; a possible collapse of
the housing market; rising regional energy prices slower than anticipated
recovery or outsourcing of manufacturing; and possible reforms to the State's
public employees retirement system, possible State and local government budget
shortfalls and other potential initiatives and reforms that could result in
increased taxes, reduced services and increased debt to address unfunded
liabilities.
The Oregon State Constitution reserves to the people the initiative
power to amend the constitution and State statutes by placing measures on the
general election ballot. In the November 2004 general election, Oregon voters
approved Measure 37, which entitles certain landowners to compensation for the
decline in market value of their property as a result of certain land use
regulations, or alternatively, to have land use regulations waived as to their
use of their property. Measure 37 primarily affects the State, counties and
certain other units of local government that make and enforce Oregon's land use
laws. According to a report of the Institute of Portland Metropolitan Studies at
Portland State University, at the end of October 2006, approximately 3,500
Measure 37 claims had been filed, requesting a total of more than $6 billion in
compensation. The vast majority of Measure 37 claims submitted have resulted in
a waiver of land use regulations. There can be no assurance that most Measure 37
claims will continue to be waived in the future, or that litigation will not
require the payment of some claims. A lawsuit was filed challenging the
constitutionality of Measure 37, and in February 2006, the Oregon Supreme Court
held that the measure does not violate the Oregon or U.S. Constitution.
Additional lawsuits have been filed, and remain pending, challenging denials of
claims and waivers.
The 2003 State Legislative Assembly enacted certain changes to the
Oregon Public Employees Retirement System (PERS). These changes were challenged
in several lawsuits in State and federal courts. The Oregon State Supreme Court
ruled on several of the cases in March 2005, upholding some changes and
rejecting others. Other cases remain pending in State and federal courts.
Depending on the outcome of these cases, State and local governments may need to
increase taxes, reduce other expenditures or increase bonded indebtedness to
cover unfunded liabilities to PERS.
As of July 2008, all outstanding general obligation bonds of the State
of Oregon are rated "AA" by S&P and "Aa2" by Moody's. Each such rating reflects
only the views of the respective rating agency, and an explanation of the
significance of such rating may be obtained from such rating agency. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely by such rating agency
if, in the judgment of such rating agency, circumstances so warrant. Any such
downward revisions or withdrawals of ratings could have adverse effects on the
market price of the State's municipal obligations.
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.
43
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.
44
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 (i) securities issued by other investment
companies, (ii) securities issued by the U.S. Government, its
agencies, instrumentalities or authorities, or (iii) repurchase
agreements fully collateralized by U.S. Government securities) 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 in companies 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 SEC, a 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 Funds will use
industry classifications provided by Bloomberg, Lehman Brothers, or other
similar sources 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 8 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.
Because each of the Tax Free Funds refers to tax-free investments in
its name, each has a fundamental investment policy that it will normally invest
at least 80% of its assets in investments that pay interest exempt from federal
and, for state-specific funds, applicable state income tax, including the
federal alternative minimum tax and, for the state-specific funds (except for
Arizona Tax Free Fund, Missouri Tax Free Fund, Nebraska Tax Free Fund, Ohio Tax
Free Fund, and Oregon Intermediate Tax Free Fund), the applicable state
alternative minimum tax.
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.
45
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.
5. Pledge any assets, except in connection with any permitted
borrowing and then in amounts not in excess of one-third of the
Fund's total assets, provided that for the purposes of this
restriction, margin deposits, security interests, liens and
collateral arrangements with respect to options, futures
contracts, options on futures contracts, and other permitted
investments and techniques are not deemed to be a pledge of
assets for purposes of this limitation.
6. Acquire any securities of registered open-end investment
companies or registered unit investment trusts in reliance on
subparagraph (F) or subparagraph (G) of Section 12(d)(1) of the
1940 Act.
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.
46
FUND NAMES
With respect to any Fund, with the exception of any Tax Free 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), the series of FAF (the "Money Market Funds"),
which are money market funds, and the series of the Mount Vernon Trust by
posting the information on the First American Funds website on a quarterly
basis. The Funds will attempt to post such information within ten business days
of the quarter end. Until such time as it is posted, it will be Undisclosed
Holdings Information, as defined below, and subject to the Funds' procedures
regarding the disclosure of Undisclosed 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 ("Undisclosed 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 Undisclosed 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. The Mount Vernon Trust is not subject to the Disclosure Policies
because the series of the trust are not available to the general public, but are
only offered in connection with the investment of collateral received in
connection with securities lending. Because of the types of securities held by,
or the limited purpose of, 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 FAF Advisors and Its Affiliates and to Fund
Directors. Undisclosed Holdings Information and information derived therefrom is
provided, or otherwise made available, on a daily basis (a) without prior
approval, to individuals who are employed by FAF Advisors and who have a need to
know the information, such as investment, compliance and treasury personnel, and
(b) to individuals employed by affiliates of FAF Advisors who are not otherwise
entitled to receive such information under "Disclosure to Fund Service Providers
and Prospective Service Providers," below, if (1) such individuals are subject
to FAF Advisors Code of Ethics, or that of an affiliate, which imposes a duty
not to trade on such information; (2) the fund to which such information relates
is subject to FAF Advisors' market timing review; and (3) FAF Advisors' Internal
Compliance Controls Committee has determined that improper use of such
information by such individuals is not likely to affect the funds in any
material respect based on factors such as the types of funds to which the
Undisclosed Holdings Information relate, the flows of investment into such
funds, and reports of portfolio managers regarding the stability of assets in
such funds.
Undisclosed 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.
47
Disclosure to Fund Service Providers and Prospective Service
Providers. Undisclosed Holdings Information and information derived therefrom is
provided, or otherwise made available, on a daily basis to the Advisor (as
described above), sub-advisors, custodians, administrators, transfer agents,
securities lending agents, and outside accountants. Undisclosed Holdings
Information may also be provided to outside counsel, entities that provide Class
B share financing, proxy voting organizations, financial printers, pricing
services and other organizations that provide or propose to provide services to
the First American Funds. Prior to receiving Undisclosed Holdings Information, a
service provider or prospective service provider must enter into a written
agreement with the Funds to maintain the information in confidence, to 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.
Notwithstanding the foregoing, any sub-advisor to a First American Fund may
disclose Undisclosed Holdings Information and information derived therefrom to
any third party which it employs to perform accounting, administrative,
reporting or ancillary services required to enable such sub-advisor to perform
its functions under its sub-advisory agreement relating to such First American
Fund, provided that (a) the third party is subject to a confidentiality
agreement that specifically prevents the misuse of such information, and (b) the
sub-advisor agrees in substance (i) to act in good faith and with due diligence
in the selection, use and monitoring of such third parties, and (ii) to be
solely responsible for any loss caused by, or mistake, gross negligence or
misconduct of, such third party.
Disclosure to Fund Ranking and Ratings Organizations. Undisclosed
Holdings Information and information derived therefrom 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, to 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.
Disclosure to Investors, Prospective Investors, and Investor
Consultants. The Disclosure Policies provide that Undisclosed Holdings
Information and information derived therefrom may be provided to investors,
prospective investors, or investor consultants with the prior approval of the
Funds' Chief Compliance Officer in the specific instance. The Chief Compliance
Officer will only approve such disclosure after concluding that it is in the
best interests of the Fund in question and its shareholders and if the recipient
has agreed in writing to maintain the information in confidence and not to trade
on the basis of any such information that is material nonpublic information. In
considering a request for such approval, the Chief Compliance Officer also shall
identify and consider any conflict of interest between the Fund and its
shareholders, on the one hand, and the Advisor and its affiliates, on the other,
which is presented by the request. 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 Advisor and its affiliates, on the other, 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 as Required by Applicable Law. Undisclosed Holdings
Information and information derived therefrom 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 entered into a written agreement with the Funds to
maintain the confidentiality of such information and not to trade on the basis
of any such information that is material nonpublic information. 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 the 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 Undisclosed Holdings
Information or information derived therefrom.
Chief Compliance Officer Reports to Fund Board. The Funds' Chief
Compliance Officer must provide a quarterly report to the Funds' board of
directors addressing exceptions to these policies and procedures during the
preceding quarter, if any.
Detective and Corrective Action. Any unauthorized release of
Undisclosed Holdings Information which comes to the attention of an employee of
the Advisor shall be reported to the Chief Compliance Officer. The Chief
Compliance Officer shall recommend an appropriate sanction to be imposed by the
individual's supervisor if the individual releasing such information is an
employee of the Advisor or other appropriate action if the individual is not an
employee of the Advisor.
48
Designee of Chief Compliance Officer. 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. The Board of Directors consists
entirely of directors who are not "interested persons" of FAIF, as that term is
defined in the 1940 Act ("Independent Directors").
INDEPENDENT DIRECTORS
NUMBER OF OTHER
POSITION(S) TERM OF OFFICE PORTFOLIOS IN FUND DIRECTORSHIPS
NAME, ADDRESS, AND HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN HELD BY
YEAR OF BIRTH WITH FUND TIME SERVED DURING PAST 5 YEARS BY DIRECTOR DIRECTOR*
---------------------- ----------- -------------------------- ------------------------- --------------------- ---------------
Benjamin R. Field III, Director Term expiring earlier of Retired; Senior Financial First American Funds None
P.O. Box 1329, death, resignation, Advisor, Bemis Company, Complex: twelve
Minneapolis, MN removal, disqualification, Inc. from May 2002 registered investment
55440-1329 (1938) or successor duly elected through February 2004. companies, including
and qualified. Director of 62 portfolios
FAIF since September 2003.
Roger A. Gibson, Director Term expiring earlier of Director, Charterhouse First American Funds None
P.O. Box 1329, death, resignation, Group, Inc., a private Complex: twelve
Minneapolis, MN removal, disqualification, equity firm, since registered investment
55440-1329 (1946) or successor duly elected October 2005; Vice companies, including
and qualified. Director of President and Chief 62 portfolios
FAIF since October 1997. Operating Officer, Cargo
- United Airlines, from
July 2001 through
retirement in June 2004.
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, MN removal, disqualification, registered investment
55440-1329 (1951) or successor duly elected companies, including
and qualified. Director of 62 portfolios
FAIF since September 2003.
John P. Kayser Director Term expiring earlier of Retired; Principal from First American Funds None
P.O. Box 1329, death, resignation, 1983 to 2004, William Complex: twelve
Minneapolis, MN removal, disqualification, Blair & Company, LLC, a registered investment
55440-1329 (1949) or successor duly elected Chicago-based investment companies, including
and qualified. Director of firm. 62 portfolios
FAIF since October 2006.
Leonard W. Kedrowski, Director Term expiring earlier of Owner and President, First American Funds None
P.O. Box 1329, death, resignation, Executive and Management Complex: twelve
Minneapolis, MN removal, disqualification, Consulting, Inc., a registered investment
55440-1329 (1941) or successor duly elected management consulting companies, including
and qualified. Director of firm; Board member, GC 62 portfolios
FAIF since November 1993. McGuiggan Corporation
(dba Smyth Companies), a
label printer; former
Chief Executive Officer,
Creative Promotions
International, LLC, a
promotional award
programs and products
company, through October
2003.
Richard K. Riederer, Director Term expiring earlier of Owner and CEO, RKR First American Funds Cleveland-
P.O. Box 1329, death, resignation, Consultants, Inc., a Complex: twelve Cliffs Inc. (a
Minneapolis, MN removal, disqualification, consulting company registered investment producer of
or successor duly elected providing advice on companies, including iron ore
and qualified. Director of business strategy, 62 portfolios pellets)
FAIF mergers and acquisitions,
and non-profit board
49
NUMBER OF OTHER
POSITION(S) TERM OF OFFICE PORTFOLIOS IN FUND DIRECTORSHIPS
NAME, ADDRESS, AND HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN HELD BY
YEAR OF BIRTH WITH FUND TIME SERVED DURING PAST 5 YEARS BY DIRECTOR DIRECTOR*
---------------------- ----------- -------------------------- ------------------------- --------------------- ---------------
55440-1329 (1944) since August 2001. member since 2005.
Joseph D. Strauss, Director Term expiring earlier of Attorney At Law, Owner First American Funds None
P.O. Box 1329, death, resignation, and President, Strauss Complex: twelve
Minneapolis, MN removal, disqualification, Management Company, a registered investment
55440-1329 (1940) or successor duly elected Minnesota holding company companies, including
and qualified. Director of for various 62 portfolios
FAIF since April 1991. organizational management
business 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.
Virginia L. Stringer, Chair; Chair term three years. Governance consultant and First American Funds None
P.O. Box 1329, Director Director term expiring non-profit board member; Complex: twelve
Minneapolis, MN earlier of death, former Owner and registered investment
55440-1329 (1944) resignation, removal, President, Strategic companies, including
disqualification, or Management Resources, 62 portfolios
successor duly elected and Inc., a management
qualified. Chair of FAIF's consulting firm;
Board since September Executive Consultant for
1997; Director of FAIF State Farm Insurance
since September 1987. Company through 2003.
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 Complex: twelve
Minneapolis, MN removal, disqualification, homebuilding company. registered investment
55440-1329 (1943) or successor duly elected companies, including
and qualified. Director of 62 portfolios
FAIF since August 2001.
----------
* Includes only directorships in a company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act or subject
to the requirements of Section 15(d) of the Securities Exchange Act, or any
company registered as an investment company under the Investment Company
Act.
EXECUTIVE OFFICERS
TERM OF OFFICE
NAME, ADDRESS, AND POSITION(S) HELD AND LENGTH OF
YEAR OF BIRTH WITH FUND 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.; Chief
FAF Advisors, Inc., Vice President Board annually; Investment Officer of FAF Advisors, Inc. since September 2007.
800 Nicollet Mall, - Investments President of FAIF
Minneapolis, MN 55402 since February 2001
(1962) *
50
TERM OF OFFICE
NAME, ADDRESS, AND POSITION(S) HELD AND LENGTH OF
YEAR OF BIRTH WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------- ---------------- --------------------- --------------------------------------------------------------
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, MN 55402 Administration of
(1956) * FAIF since March 2000
Charles D. Gariboldi, Jr. Treasurer Re-elected by the Mutual Funds Treasurer, FAF Advisors, Inc., since October
FAF Advisors, Inc. Board annually; 2004; prior thereto, Vice President - Investment Accounting
800 Nicollet Mall, Treasurer of FAIF and Fund Treasurer, Thrivent Financial for Lutherans.
Minneapolis, MN 55402 Since December 2004
(1959) *
Jill M. Stevenson, Assistant Re-elected by the Assistant Mutual Funds Treasurer, FAF Advisors, Inc. since
FAF Advisors, Inc. Treasurer Board annually; September 2005; prior thereto, Director and Senior Project
800 Nicollet Mall, Assistant Treasurer Manager, FAF Advisors, Inc.
Minneapolis, MN 55402 of FAIF since
(1965) * September 2005
David H. Lui, Chief Compliance Re-elected by the Chief Compliance Officer, FAF Advisors, Inc. since February
FAF Advisors, Inc. Officer Board annually; Chief 2005; Chief Compliance Officer, Franklin Advisors, Inc. and
800 Nicollet Mall, Compliance Officer of Chief Compliance Counsel, Franklin Templeton Investments from
Minneapolis, MN 55402 FAIF since February March 2004 to February 2005; prior thereto, Vice President,
(1960) * 2005 Charles Schwab & Co., Inc.
Mark D. Corns Anti-Money Re-elected by the Director of Compliance, FAF Advisors, Inc. since June 2006;
FAF Advisors, Inc. Laundering Board annually; Compliance Manager, FAF Advisors, Inc. from January 2005 to
800 Nicollet Mall, Officer Anti-Money Laundering June 2006; prior thereto, Compliance Manager,
Minneapolis, MN 55402 Officer of FAIF since OppenheimerFunds, Inc.
(1963) * September 2008
Kathleen L. Prudhomme, Secretary Re-elected by the Deputy General Counsel, FAF Advisors, Inc., since November
FAF Advisors, Inc. Board annually; 2004; prior thereto, Partner, Dorsey & Whitney LLP, a
800 Nicollet Mall, Secretary of FAIF Minneapolis-based law firm.
Minneapolis, MN 55402 since December 2004;
(1953) * Assistant Secretary
of FAIF from
September 1998
through December 2004
Richard J. Ertel, Assistant Re-elected by the Counsel, FAF Advisors, Inc., since May 2006; prior thereto,
FAF Advisors, Inc., Secretary Board annually; Counsel, Ameriprise Financial Services, Inc. from September
800 Nicollet Mall, Assistant Secretary 2004 to May 2006; prior thereto, Counsel, FAF Advisors, Inc.
Minneapolis, MN 55402 of FAIF since June
(1967) * 2006 and from June
2003 through August
2004
James D. Alt, Assistant Re-elected by the Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm.
Dorsey & Whitney LLP Secretary Board annually;
50 South Sixth Street, Assistant Secretary
Suite 1500, Minneapolis, of FAIF since
MN 55402 (1951) December 2004;
Secretary of FAIF
from June 2002
through December
2004; Assistant
Secretary of FAIF
from September 1998
through June 2002
James R. Arnold, Assistant Re-elected by the Senior Vice President, U.S. Bancorp Fund Services, LLC
U.S. Bancorp Fund Secretary Board annually;
Services, LLC, Assistant Secretary
615 E. Michigan Street, of FAIF since June
Milwaukee, WI 53202 2003
(1957)*
----------
* Messrs. Schreier, Wilson, Gariboldi, Lui, Corns, and Ertel, Ms. Stevenson
and Ms. Prudhomme are each officers and/or employees of FAF Advisors, Inc.,
which serves as investment advisor and administrator for FAIF. Mr. Arnold
is an officer of U.S. Bancorp Fund Services, LLC, which is a subsidiary of
U.S. Bancorp and which serves as transfer agent for FAIF.
51
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 6/30/08
---------------------------------------------------- --------------------------------- --------------
Audit The purposes of the Committee are (1) to oversee the Leonard W. Kedrowski (Chair) 8
Committee Funds' accounting and financial reporting policies Benjamin R. Field III
and practices, their internal controls and, as John P. Kayser
appropriate, the internal controls of certain Richard K. Riederer
service providers; (2) to oversee the quality of the Virginia L. Stringer (ex-officio)
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 The Committee is responsible for valuing portfolio Roger A. Gibson (Chair) 5
Committee securities for which market quotations are not Benjamin R. Field III
readily available, pursuant to procedures James M. Wade
established by the Board of Directors. Virginia L. Stringer (ex-officio)
Governance The Committee has responsibilities relating to (1) Joseph D. Strauss (Chair) 5
Committee Board and Committee composition (including, James M. Wade
interviewing and recommending to the Board nominees Victoria J. Herget
for election as directors; reviewing the Virginia L. Stringer (ex-officio)
independence of 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 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
52
NUMBER OF FUND
COMPLEX
COMMITTEE
MEETINGS HELD
DURING FAIF'S
FISCAL PERIOD
COMMITTEE FUNCTION COMMITTEE MEMBERS ENDED 6/30/08
---------------------------------------------------- --------------------------------- --------------
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,
including in each case the value of fund shares elected by Directors in the
directors' deferred compensation plan.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES
NAME OF DIRECTOR DOLLAR RANGE OF EQUITY SECURITIES IN FAIF IN THE 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
53
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES
NAME OF DIRECTOR DOLLAR RANGE OF EQUITY SECURITIES IN FAIF IN THE FIRST AMERICAN FUNDS COMPLEX*
--------------------- ----------------------------------------- -------------------------------------------
John P. Kayser Over $100,000 Over $100,000
Leonard W. Kedrowski $50,001-$100,000 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, 2008.
As of October 15, 2008, 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 or 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 $135,000 ($245,000 in the case of the Chair).
The Fund Review Liaison and the Audit Committee Chair each receive an additional
annual retainer of $20,000. The other standing Committee Chairs receive an
additional annual retainer of $15,000. In addition, directors are paid the
following fees for attending Board and committee meetings:
- $1,000 for attending the first day of an in-person Board of
Directors meeting ($1,500 in the case of the Chair);
- $2,000 for attending the second day of an in-person Board of
Directors meeting ($3,000 in the case of the Chair);
- $1,000 for attending the third day of an in-person Board of
Directors meeting ($1,500 in the case of the Chair), assuming the
third day ends no later than early afternoon;
- $500 for in-person attendance at any committee meeting ($750 in
the case of the Chair of each committee);
A Director who participates telephonically in any in-person Board or
Committee meeting receives half of the fee that Director would have received for
attending, in-person, the Board or Committee meeting. For telephonic Board and
Committee meetings, the Chair and each Director and Committee Chair, as
applicable, receive a fee equal to half the fee he or she would have received
for attending an in-person meeting.
Directors also receive $3,500 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 above are allocated evenly 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.
54
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, Mount Vernon Trust, and FACEF collectively (column 5) during
the fiscal year ended June 30, 2008. 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, 2008
AGGREGATE PENSION OR ESTIMATED TOTAL COMPENSATION
COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM REGISTRANT AND
FROM ACCRUED AS PART OF UPON FUND COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT (1) FUND EXPENSES RETIREMENT TO DIRECTORS (2)
------------------------ -------------- ------------------- --------------- -------------------
Benjamin R. Field III, Director $101,379 -0- -0- $155,500
Roger A. Gibson, Director 109,206 -0- -0- 168,000
Victoria J. Herget, Director 111,803 -0- -0- 172,250
John P. Kayser, Director 100,401 -0- -0- 154,000
Leonard W. Kedrowski, Director 114,130 -0- -0- 176,250
Richard K. Riederer, Director 100,075 -0- -0- 153,500
Joseph D. Strauss, Director 109,823 -0- -0- 168,625
Virginia L. Stringer, Director & Chair 182,059 -0- -0- 279,250
James M. Wade, Director 100,890 -0- -0- 154,750
----------
(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, $21,583; Victoria J. Herget, $33,194; Leonard
W. Kedrowski, $52,031; and Joseph D. Strauss, $7,564.
(2) Included in the Total Compensation are amounts deferred for the following
directors pursuant to the Deferred Compensation Plan: Roger A. Gibson,
$33,600; Victoria J. Herget, $51,675; Leonard W. Kedrowski, $81,000; and
Joseph D. Strauss, $11,775.
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 SEC.
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, in turn, 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 operates four
banks and eleven trust companies with banking offices in twenty-four contiguous
states. U.S. Bancorp also has various other subsidiaries engaged in financial
services. At September 30, 2008, U.S. Bancorp and its consolidated subsidiaries
had consolidated assets of more than $247 billion, consolidated deposits of more
than $139 billion and shareholders' equity of $21.7 billion.
55
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 series of FAIF then in existence. 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:
GROSS ADVISORY
FUND 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 period ended June 30, 2006,
and the fiscal years ended June 30, 2007 and June 30, 2008:
56
FISCAL PERIOD ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
----------------------------- ----------------------------- -----------------------------
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 $7,017,650 $5,935,542 $8,798,340 $7,780,479 $8,264,262 $7,301,988
High Income Bond Fund 1,357,103 989,397 1,881,003 1,352,241 1,772,113 1,252,833
Inflation Protected Securities Fund 1,131,338 622,109 1,647,597 957,956 1,307,444 711,566
Intermediate Government Bond Fund 213,042 40,252 198,072 --(1) 286,383 15,863
Intermediate Term Bond Fund 3,821,013 2,458,961 4,288,699 3,805,205 3,959,470 3,517,146
Short Term Bond Fund 2,360,705 1,466,158 2,314,192 1,439,839 1,727,361 1,004,154
Total Return Bond Fund 1,615,159 1,144,295 3,596,965 2,836,969 6,050,535 4,855,983
U.S. Government Mortgage Fund 683,727 460,952 816,259 476,605 742,878 396,168
Arizona Tax Free Fund 98,606 --(1) 138,213 --(1) 144,351 --(1)
California Intermediate Tax Free Fund 209,430 96,198 296,787 116,028 285,693 104,990
California Tax Free Fund 131,244 --(1) 188,316 --(1) 199,996 --(1)
Colorado Intermediate Tax Free Fund 170,566 62,672 211,050 37,206 233,616 57,455
Colorado Tax Free Fund 81,346 --(1) 117,350 --(1) 114,795 --(1)
Intermediate Tax Free Fund 2,462,096 1,953,362 3,128,701 2,674,306 3,089,673 2,674,331
Minnesota Intermediate Tax Free Fund 809,293 593,589 992,725 752,160 957,861 729,409
Minnesota Tax Free Fund 609,547 422,113 852,931 599,164 866,712 609,708
Missouri Tax Free Fund 656,211 467,075 799,608 555,043 797,616 552,095
Nebraska Tax Free Fund 152,530 --(1) 200,007 --(1) 192,020 --(1)
Ohio Tax Free Fund 155,376 --(1) 211,667 --(1) 227,153 --(1)
Oregon Intermediate Tax Free Fund 494,201 332,012 609,795 402,080 609,599 404,259
Short Tax Free Fund 1,072,516 586,855 1,013,458 545,583 761,835 370,044
Tax Free Fund 1,838,505 1,428,776 2,687,624 2,264,314 2,682,998 2,264,794
(1) Advisory and certain other fees for the period were waived by the Advisor
to comply with total operating expense limitations that were agreed upon by
the funds and the Advisor.
ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES
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 intermediaries that sell
shares of First American Funds (such as brokers, dealers, banks, registered
investment advisors, retirement plan administrators and other intermediaries;
hereinafter, individually, "Intermediary," and collectively, "Intermediaries")
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 Intermediary or its representatives to recommend or offer
shares of the Funds or other First American Funds to its customers. The
Intermediary may elevate the prominence or profile of the Funds within the
Intermediary'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 Intermediary's organization.
These payments are made pursuant to negotiated agreements with
Intermediaries. The payments 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 Intermediary 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 selected Intermediaries that are registered
as holders or dealers of record for accounts invested in one or more of the
First American Funds or that make First American Fund shares available through
employee benefit plans or fee-based advisory programs to compensate them for the
variety of services they provide.
57
Marketing Support Payments. Services for which an Intermediary
receives marketing support payments may include business planning assistance,
advertising, educating the Intermediary's personnel about the First American
Funds and shareholder financial planning needs, placement on the Intermediary's
preferred or recommended fund company list, and access to sales meetings, sales
representatives and management representatives of the Intermediary. In addition,
Intermediaries 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 Intermediary.
The Advisor and/or the Distributor compensates Intermediaries
differently depending upon, among other factors, the number or value of Fund
shares that the Intermediary sells or may sell, the value of the assets invested
in the Funds by the Intermediary's customers, 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 Intermediary.
Such payments are generally asset based but also may include the payment of a
lump sum.
Program Servicing Payments. Services for which an Intermediary
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
Intermediary may perform program services itself or may arrange with a third
party to perform program services.
Program servicing payments typically apply to employee benefit plans,
such as retirement plans, or fee-based advisory programs but may apply to retail
sales and assets in certain situations. The payments are based on such factors
as the type and nature of services or support furnished by the Intermediary and
are generally asset based.
Marketing Support and Program Servicing Payment Guidelines. In the
case of any one Intermediary, 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 Intermediary
on an annual basis. Such exceptions include instances in which an Intermediary
does not receive distribution fees with respect to a Fund share class which
provides a distribution fee, in which case such Intermediary may receive up to
0.50% of the average net assets of that Fund share class attributable to that
Intermediary on an annual basis. U.S. Bank, N.A. and its affiliates may be
eligible to receive payments that exceed 0.35% of the average net assets of Fund
shares attributable to U.S. Bank, N.A. or its affiliates on an annual basis. In
addition, in connection with the sale of a business by the Advisor's parent
company, U.S. Bank, N.A., to Great-West Life & Annuity Insurance Company
("Great-West"), the Advisor has entered into a services agreement with GWFS
Equities, Inc., an affiliate of Great-West, which provides for payments of up to
0.60% of the average net assets of Fund shares attributable to GWFS Equities,
Inc. on an annual basis.
Other Payments
From time to time, the Advisor and/or the Distributor, at its expense,
may provide other compensation to Intermediaries that sell or arrange for the
sale of shares of the Fund(s), which may be in addition to marketing support and
program servicing payments described above. For example, the Advisor and/or the
Distributor may: (i) compensate Intermediaries for National Securities Clearing
Corporation networking system services (e.g., shareholder communication, account
statements, trade confirmations, and tax reporting) on an asset based or per
account basis; (ii) compensate Intermediaries for providing Fund shareholder
trading information; (iii) make one-time or periodic payments to reimburse
selected Intermediaries for items such as ticket charges (i.e., fees that an
Intermediary charges its representatives for effecting transactions in Fund
shares) of up to $25 per purchase or exchange order, operational charges (e.g.,
fees that an Intermediary charges for establishing a Fund on its trading
system), and literature printing and/or distribution costs; and (iv) at the
direction of a retirement plan's sponsor, reimburse or pay direct expenses of an
employee benefit plan that would otherwise be payable by the plan.
When not provided for in a marketing support or program servicing
agreement, the Advisor and/or the Distributor may pay Intermediaries 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 Intermediary employees, client and investor events and
other Intermediary -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
58
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, all or a portion of 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. Total
compensation of employees of the Advisor and/or the Distributor with 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 compensation may be offered to the extent not prohibited by
state laws or any self-regulatory agency, such as FINRA. Investors can ask their
Intermediary 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 Intermediary payment arrangements into
account when considering and evaluating any recommendations relating to Fund
shares.
Intermediaries Receiving Additional Payments
The following is a list of Intermediaries receiving one or more of the
types of payments discussed above as of September 30, 2008:
401(k) Company, Inc. (The)
Acclaim Benefits, Inc.
ADP Broker-Dealer, Inc.
A.G. Edwards & Sons, Inc.
AIG Retirement Company
American United Life Insurance Company
Ameriprise Financial Services, Inc.
Benefit Plan Administrative Services, Inc.
Bisys Retirement Services, Inc.
Charles Schwab & Co., Inc.
Citigroup Global Markets Inc.
CitiStreet Advisors LLC / CitiStreet LLC
Commonwealth Equity Services, LLP, DBA Commonwealth Financial Network
Country Trust Bank
CPI Qualified Plan Consultants, Inc.
D.A. Davidson & Co.
Digital Retirement Solutions, Inc.
Dyatech, LLC
ExpertPlan, Inc.
Fidelity Brokerage Services LLC / National Financial Services LLC / Fidelity
Investments Institutional Operations Company, Inc.
Fidelity Investments Institutional Operations Company, Inc.
Fintegra, LLC
Fiserv Trust Company
Genesis Employee Benefits, Inc. DBA America's VEBA Solution
GWFS Equities, Inc.
Hewitt Associates LLC
ICMA Retirement Corporation
International Clearing Trust Company
Janney Montgomery Scott LLC
J.P. Morgan Retirement Plan Services, LLC
59
Leggette Actuaries, Inc.
Lincoln Retirement Services Company LLC / AMG Service Corp.
Linsco/Private Ledger Corp.
Marshall & Ilsley Trust Company, N.A.
Massachusetts Mutual Life Insurance Company
Mercer HR Outsourcing LLC
Merrill Lynch, Pierce, Fenner & Smith Inc.
MetLife Securities, Inc.
Mid Atlantic Capital Corporation
Morgan Stanley & Co., Incorporated
MSCS Financial Services, LLC
Newport Retirement Services, Inc.
NYLife Distributors LLC
Pershing LLC
Planners Network, Inc.
Principal Life Insurance Company
Prudential Insurance Company of America (The)
Prudential Investment Management Services, LLC / Prudential Investments LLC
Raymond James & Associates / Raymond James Financial Services, Inc.
RBC Dain Rauscher, Inc.
Reliance Trust Company
Retirement Plan Company, LLC (The)
Robert W. Baird & Co., Inc.
Stifel, Nicolaus & Co., Inc.
SunGard Institutional Brokerage Inc.
Symetra Life Insurance Company
T. Rowe Price Investment Services, Inc. / T. Rowe Price Retirement Plan
Services, Inc.
TD Ameritrade, Inc.
UBS Financial Services, Inc.
Unified Trust Company, N.A.
U.S. Bancorp Investments, Inc.
U.S. Bank, N.A.
Vanguard Group, Inc.
Wachovia Bank, N.A.
Wachovia Securities, LLC
Wells Fargo Bank, N.A.
Wilmington Trust Company
Wilmington Trust Retirement and Institutional Services Company (formerly AST
Capital Trust Company)
Woodbury Financial Services, Inc.
Any additions, modification or deletions to the list of Intermediaries
identified above that have occurred since September 30, 2008 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, 2006. U.S. Bancorp Fund Services, LLC ("USBFS"), 615 East Michigan
Street, Milwaukee, WI 53202, serves as sub-administrator pursuant to a
Sub-Administration Agreement between the Administrator and USBFS dated July 1,
2005. USBFS is a subsidiary of U.S. Bancorp. Under the Administration Agreement,
the Administrator provides, or compensates others to provide, services to the
Funds. These services include various legal, oversight, administrative, and
accounting services. The Funds pay the Administrator fees which are calculated
daily and paid monthly. Prior to July 1, 2006, such fees were 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 Family of Funds 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. All fees paid to USBFS, as sub-administrator, are paid
from the administration fee.
60
Prior to July 1, 2006, as part of the transfer agent fee, the Funds
paid USBFS a fee equal, on an annual basis, to 0.10% of each fund's average
daily net assets, to compensate USBFS for providing certain shareholder services
and reimbursed USBFS for its payments to financial intermediaries that establish
and maintain omnibus accounts and provide customary services for such accounts.
Effective July 1, 2006, this fee was incorporated into the administration fee
which, as a result, on an annual basis, is 0.25% of the aggregate average daily
net assets of all open-end mutual funds in the First American Family of Funds up
to $8 billion, 0.235% on the next $17 billion of the aggregate average daily net
assets, 0.22% on the next $25 billion of the aggregate average daily net assets,
and 0.20% of the aggregate average daily net assets in excess of $50 billion. In
addition to these fees, the Funds may reimburse the Administrator for any
out-of-pocket expenses incurred in providing administration services.
The following table sets forth total administrative fees, after
waivers, paid by each of the Funds listed below to the Administrator and USBFS
for the fiscal period ended June 30, 2006, and the fiscal years ended June 30,
2007 and June 30, 2008:
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FUND JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
---- ------------- ------------- -------------
Core Bond Fund $1,773,007 $3,890,198 $3,643,554
High Income Bond Fund 244,896 595,479 556,303
Inflation Protected Securities Fund 285,778 733,425 577,013
Intermediate Government Bond Fund 53,857 88,392 125,072
Intermediate Term Bond Fund 965,643 1,908,661 1,745,816
Short Term Bond Fund 596,629 1,026,892 764,278
Total Return Bond Fund 339,926 1,293,655 2,255,056
U.S. Government Mortgage Fund 172,779 362,655 323,012
Arizona Tax Free Fund 24,907 61,522 62,842
California Intermediate Tax Free Fund 52,906 132,163 125,467
California Tax Free Fund 33,157 83,980 87,446
Colorado Intermediate Tax Free Fund 43,100 93,948 101,874
Colorado Tax Free Fund 20,550 52,117 49,768
Intermediate Tax Free Fund 622,068 1,392,829 1,364,196
Minnesota Intermediate Tax Free Fund 204,496 442,655 422,395
Minnesota Tax Free Fund 153,985 379,744 381,768
Missouri Tax Free Fund 165,804 356,037 351,363
Nebraska Tax Free Fund 38,535 88,906 83,714
Ohio Tax Free Fund 39,253 94,319 99,562
Oregon Intermediate Tax Free Fund 124,892 271,584 268,069
Short Tax Free Fund 271,073 451,236 336,382
Tax Free Fund 464,449 1,193,928 1,181,356
TRANSFER AGENT
USBFS serves as the Funds' transfer agent pursuant to a Transfer
Agency and Shareholder Servicing Agreement (the "Transfer Agent Agreement")
between USBFS and the Funds dated July 1, 2006. For the period July 1, 2005 to
July 1, 2006, the Funds paid $18,500 per share class and additional per account
fees for transfer agent services. These fees were allocated to each Fund based
upon the fund's pro rata share of the aggregate average daily net assets of the
funds that comprise FAIF. Under the Transfer Agent Agreement, the Funds also
paid USBFS 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 intermediaries with whom it has
contracted to establish and service omnibus accounts. In addition, USBFS was
reimbursed for its out-of-pocket expenses incurred while providing its services
to the Funds.
Effective July 1, 2006, the Funds are charged transfer agent fees on a
per shareholder account basis, subject to a minimum fee per share class. These
fees will be charged to each fund based on the number of accounts within that
fund. The 0.10% fee for shareholder services and payments to financial
intermediaries has been incorporated into the administration fee. The $18,500
per share class fee that was charged in addition to per account fees has been
eliminated. The Funds will continue to reimburse USBFS for out-of-pocket
expenses incurred in providing transfer agent services.
The following table sets forth transfer agent fees paid by the Funds
to USBFS for the fiscal period ended June 30, 2006, and the fiscal years ended
June 30, 2007 and June 30, 2008:
61
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FUND JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
---- ------------- ------------- -------------
Core Bond Fund $1,904,710 $249,886 $219,760
High Income Bond Fund 263,075 118,170 109,184
Inflation Protected Securities Fund 306,877 91,151 90,007
Intermediate Government Bond Fund 57,906 53,824 54,000
Intermediate Term Bond Fund 1,037,728 57,013 54,000
Short Term Bond Fund 641,285 117,083 102,261
Total Return Bond Fund 364,892 110,026 107,999
U.S. Government Mortgage Fund 185,655 110,169 107,999
Arizona Tax Free Fund 26,753 72,573 72,000
California Intermediate Tax Free Fund 56,822 54,104 54,000
California Tax Free Fund 35,614 72,307 72,000
Colorado Intermediate Tax Free Fund 46,307 54,075 54,000
Colorado Tax Free Fund 22,069 72,576 72,000
Intermediate Tax Free Fund 668,293 54,665 54,000
Minnesota Intermediate Tax Free Fund 219,726 54,682 54,000
Minnesota Tax Free Fund 165,412 77,570 72,000
Missouri Tax Free Fund 178,136 72,125 72,000
Nebraska Tax Free Fund 41,396 72,390 72,000
Ohio Tax Free Fund 42,167 72,097 72,000
Oregon Intermediate Tax Free Fund 134,205 53,961 54,000
Short Tax Free Fund 291,362 53,227 54,000
Tax Free Fund 498,840 75,047 72,000
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
Intermediaries") 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 Intermediaries.
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 intermediaries through whom 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 intermediaries 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
62
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 intermediaries 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 Intermediaries 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 period ended June 30, 2006, and the fiscal years ended June
30, 2007 and June 30, 2008:
TOTAL UNDERWRITING COMMISSIONS
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FUND JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
---- ------------- ------------- -------------
Core Bond Fund $ 34,389 $ 41,491 $ 46,620
High Income Bond Fund 38,640 35,818 22,250
Inflation Protected Securities Fund 9,051 5,810 4,596
Intermediate Government Bond Fund 1,430 671 17,068
Intermediate Term Bond Fund 11,326 7,064 4,605
Short Term Bond Fund 10,466 5,976 5,947
Total Return Bond Fund 23,549 8,437 39,564
U.S. Government Mortgage Fund 8,924 20,319 3,858
Arizona Tax Free Fund 16,857 15,362 12,335
California Intermediate Tax Free Fund 4,603 14,190 3,074
California Tax Free Fund 48,900 48,994 64,530
Colorado Intermediate Tax Free Fund 665 5,022 9,758
Colorado Tax Free Fund 3,223 6,000 6,916
Intermediate Tax Free Fund 4,619 914 5,437
Minnesota Intermediate Tax Free Fund 25,247 6,123 27,853
Minnesota Tax Free Fund 189,617 330,339 357,965
Missouri Tax Free Fund 22,031 59,848 18,993
Nebraska Tax Free Fund 7,335 7,782 15,672
Ohio Tax Free Fund 4,958 1,275 3,508
Oregon Intermediate Tax Free Fund 15,532 1,439 6,097
Short Tax Free Fund 30 2,243 39
Tax Free Fund 29,586 48,169 55,389
UNDERWRITING COMMISSIONS RETAINED BY QUASAR
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FUND JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
---- ------------- ------------- -------------
Core Bond Fund $ 2,924 $ 3,895 $ 4,547
High Income Bond Fund 5,630 4,993 1,584
Inflation Protected Securities Fund 1,380 344 335
Intermediate Government Bond Fund 292 186 4,313
Intermediate Term Bond Fund 1,671 1,098 918
Short Term Bond Fund 2,741 887 917
Total Return Bond Fund 2,053 969 3,384
U.S. Government Mortgage Fund 689 1,935 424
Arizona Tax Free Fund 1,131 998 898
California Intermediate Tax Free Fund 572 2,001 392
California Tax Free Fund 3,890 4,588 5,050
Colorado Intermediate Tax Free Fund 91 708 1,274
63
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FUND JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
---- ------------- ------------- -------------
Colorado Tax Free Fund 539 451 501
Intermediate Tax Free Fund 781 107 1,049
Minnesota Intermediate Tax Free Fund 3,866 777 4,946
Minnesota Tax Free Fund 15,207 25,975 40,301
Missouri Tax Free Fund 1,825 5,594 1,401
Nebraska Tax Free Fund 490 663 1,042
Ohio Tax Free Fund 408 71 254
Oregon Intermediate Tax Free Fund 2,634 205 777
Short Tax Free Fund 3 582 6
Tax Free Fund 2,323 4,229 4,262
The Distributor received the following compensation from the Funds
during the Funds' most recent fiscal year ended June 30, 2008:
NET UNDERWRITING COMPENSATION ON
DISCOUNTS AND REDEMPTIONS AND BROKERAGE OTHER
COMMISSIONS REPURCHASES COMMISSIONS COMPENSATION*
---------------- --------------- ----------- -------------
Core Bond Fund $ 4,547 $17,423 -- --
High Income Bond Fund 1,584 11,009 -- --
Inflation Protected Securities Fund 335 38 -- --
Intermediate Government Bond Fund 4,313 -- -- --
Intermediate Term Bond Fund 918 -- -- --
Short Term Bond Fund 917 -- -- --
Total Return Bond Fund 3,384 1,707 -- --
U.S. Government Mortgage Fund 424 13,554 -- --
Arizona Tax Free Fund 898 55 -- --
California Intermediate Tax Free Fund 392 -- -- --
California Tax Free Fund 5,050 681 -- --
Colorado Intermediate Tax Free Fund 1,274 -- -- --
Colorado Tax Free Fund 501 1,056 -- --
Intermediate Tax Free Fund 1,049 -- -- --
Minnesota Intermediate Tax Free Fund 4,946 -- -- --
Minnesota Tax Free Fund 40,301 17,831 -- --
Missouri Tax Free Fund 1,401 -- -- --
Nebraska Tax Free Fund 1,042 -- -- --
Ohio Tax Free Fund 254 -- -- --
Oregon Intermediate Tax Free Fund 777 -- -- --
Short Tax Free Fund 6 -- -- --
Tax Free Fund 4,262 79 -- --
* 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 from fees
earned by U.S. Bancorp Fund Services, LLC, under a separate arrangement as
part of the Sub-Administration Agreement between FAF Advisors and U.S.
Bancorp Fund Services, LLC.
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
Intermediaries. 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.
64
The following table sets forth the total Rule 12b-1 fees, after
waivers, paid by certain of the Funds for the fiscal year ended June 30, 2008
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 YEAR ENDED JUNE 30, 2008
RULE 12B-1 FEES
----------------------------------------
CLASS A CLASS B CLASS C CLASS R
FUND SHARES SHARES SHARES SHARES
---- -------- ------- -------- --------
Core Bond Fund $252,258 $84,960 $ 45,193 $1,136
High Income Bond Fund 70,673 40,004 70,845 946
Inflation Protected Securities Fund 7,604 * 3,439 5,122
Intermediate Government Bond Fund 6,381 * * *
Intermediate Term Bond Fund 43,960 * * *
Short Term Bond Fund 96,088 * * *
Total Return Bond Fund 37,684 22,445 28,816 1,202
U.S. Government Mortgage Fund 31,046 43,125 26,187 4,056
Arizona Tax Free Fund 18,317 * 8,703 *
California Intermediate Tax Free Fund 1,567 * * *
California Tax Free Fund 18,522 * 9,853 *
Colorado Intermediate Tax Free Fund 9,140 * * *
Colorado Tax Free Fund 16,584 * 17,884 *
Intermediate Tax Free Fund 41,979 * * *
Minnesota Intermediate Tax Free Fund 13,922 * * *
Minnesota Tax Free Fund 260,325 * 110,184 *
Missouri Tax Free Fund 60,444 * 3,283 *
Nebraska Tax Free Fund 15,929 * 11,548 *
Ohio Tax Free Fund 1,670 * 1,276 *
Oregon Intermediate Tax Free Fund 10,433 * * *
Short Tax Free Fund 3,570 * * *
Tax Free Fund 89,731 * 18,572 *
----------
* Fund or class was not in operation during this fiscal period.
The following table sets forth the Rule 12b-1 fees the Distributor
paid to Participating Intermediaries for the fiscal year ended June 30, 2008
with respect to the Class A shares, Class B shares, Class C shares and Class R
shares of the Funds.
FISCAL YEAR ENDED JUNE 30, 2008
--------------------------------------
CLASS A CLASS B CLASS C CLASS R
SHARES SHARES SHARES SHARES
-------- ------- ------- -------
Core Bond Fund $131,262 $18,929 $14,237 $370
High Income Bond Fund 16,389 6,836 15,984 644
Inflation Protected Securities Fund 5,040 * 1,723 --
Intermediate Government Bond Fund 1,949 * * *
Intermediate Term Bond Fund 24,014 * * *
Short Term Bond Fund 48,260 * * *
Total Return Bond Fund 26,540 4,489 16,463 249
U.S. Government Mortgage Fund 24,294 9,967 5,711 --
Arizona Tax Free Fund 364 * 2,067 *
California Intermediate Tax Free Fund 4,590 * * *
California Tax Free Fund 22,704 * 7,766 *
Colorado Intermediate Tax Free Fund 4,975 * * *
Colorado Tax Free Fund 4,718 * 2,356 *
Intermediate Tax Free Fund 22,934 * * *
Minnesota Intermediate Tax Free Fund 15,067 * * *
Minnesota Tax Free Fund 36,640 * 64,808 *
Missouri Tax Free Fund 50,217 * 2,482 *
Nebraska Tax Free Fund 3,217 * 4,848 *
Ohio Tax Free Fund 1,249 * 945 *
Oregon Intermediate Tax Free Fund 6,959 * * *
Short Tax Free Fund 3,074 * * *
Tax Free Fund 28,911 * 5,109 *
----------
* Fund or class was not in operation during this fiscal period.
65
CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Custodian. U.S. Bank, 60 Livingston Avenue, St. Paul, MN 55101, acts
as the custodian for each Fund (the "Custodian"). U.S. Bank is a subsidiary of
U.S. Bancorp. The Custodian takes no part in determining the investment policies
of the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash
are held by the Custodian. The Custodian delivers securities against payment
upon sale and pays for securities against delivery upon purchase. The Custodian
also remits Fund assets in payment of Fund expenses, pursuant to instructions of
FAIF's officers or resolutions of the Board of Directors.
As compensation for its services as custodian to the Funds, the
Custodian is paid a monthly fee calculated on an annual basis equal to 0.005% of
each such Fund's average daily net assets. In addition, the Custodian is
reimbursed for its out-of-pocket expenses incurred while providing services to
the Funds. The Custodian continues to serve so long as its appointment is
approved at least annually by the Board of Directors including a majority of the
directors who are not interested persons (as defined under the 1940 Act) of
FAIF.
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
OTHER ACCOUNTS MANAGED
The following table sets forth the number and total assets of the
mutual funds and accounts managed by the Funds' portfolio managers as of June
30, 2008.
NUMBER OF AMOUNT SUBJECT TO
PORTFOLIO MANAGER TYPE OF ACCOUNT MANAGED ACCOUNTS ASSETS PERFORMANCE-BASED FEE
----------------- -------------------------------- --------- -------------- --------------------------
Christopher L. Drahn Registered Investment Company 3 $243.1 million 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 5 $209.3 million 0
Jeffrey J. Ebert Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 14 $736.7 million 1 account - $137.5 million
John T. Fruit Registered Investment Company 1 $ 74.8 million 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 0 0 0
Michael S. Hamilton Registered Investment Company 1 $412.0 million 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 2 $175.0 million 0
Gregory A. Hanson Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 13 $ 1.2 billion 0
Wan-Chong Kung Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 12 $423.0 million 0
Chris J. Neuharth Registered Investment Company 5 $696.4 million 0
Other Pooled Investment Vehicles 1 $984.0 million 0
Other Accounts 12 $ 1.3 billion 1 account - $137.5 million
66
NUMBER OF AMOUNT SUBJECT TO
PORTFOLIO MANAGER TYPE OF ACCOUNT MANAGED ACCOUNTS ASSETS PERFORMANCE-BASED FEE
----------------- -------------------------------- --------- -------------- --------------------------
Marie A. Newcome Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 1 $984.0 million 0
Other Accounts 32 $415.0 million 0
Jason J. O'Brien Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 0 0 0
Timothy A. Palmer Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 1 $108.7 million 0
Other Accounts 13 $576.0 million 0
Linda M. Sauber Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 0 0 0
Jeffrey T. Schmitz Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 0 0 0
Michael L. Welle Registered Investment Company 0 0 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 1 $ 2.0 million 0
Douglas J. White Registered Investment Company 4 $655.1 million 0
Other Pooled Investment Vehicles 0 0 0
Other Accounts 6 $121.8 million 0
SIMILAR ACCOUNTS. 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.
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
67
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) performance 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.
OWNERSHIP OF FUND SHARES
The following table indicates as of June 30, 2008 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 A F
California Tax Free Fund A
Colorado Intermediate Tax Free Fund A
Colorado Tax Free Fund A
Intermediate Tax Free Fund A
Minnesota Intermediate Tax Free Fund A
Minnesota Tax Free Fund A
Missouri Tax Free Fund A
Nebraska Tax Free Fund A
Ohio Tax Free Fund A
Oregon Intermediate Tax Free Fund A
Short Tax Free Fund A
Tax Free Fund A
Jeffrey J. Ebert Core Bond Fund C D
Intermediate Term Bond Fund A
Total Return Bond Fund A
John T. Fruit High Income Bond Fund D E
Michael S. Hamilton Arizona Tax Free Fund A D
California Intermediate Tax Free Fund A
California Tax Free Fund A
Ohio Tax Free Fund A
Oregon Intermediate Tax Free Fund A
Gregory A. Hanson High Income Bond Fund A E
Wan-Chong Kung Core Bond Fund D E
Inflation Protected Securities Fund A
Intermediate Government Bond Fund A
Intermediate Term Bond Fund A
Total Return Bond Fund A
Chris J. Neuharth Core Bond Fund D E
Short Term Bond Fund A
68
OWNERSHIP IN FUND
PORTFOLIO MANAGER FUND OWNERSHIP IN FUND COMPLEX
----------------- ------------------------------------- ----------------- -----------------
Total Return Bond Fund A
U.S. Government Mortgage Fund A
Marie A. Newcome Short Term Bond Fund A C
Jason J. O'Brien U.S. Government Mortgage Fund A D
Timothy A. Palmer Core Bond Fund A B
Total Return Bond Fund A
Linda M. Sauber Inflation Protected Securities Fund A D
Intermediate Government Bond Fund A
Jeffrey T. Schmitz High Income Bond Fund A C
Michael L. Welle Colorado Intermediate Tax Free Fund A B
Colorado Tax Free Fund A
Nebraska Tax Free Fund A
Short Tax Free Fund A
Douglas J. White Arizona Tax Free Fund A E
Intermediate Tax Free Fund A
Minnesota Intermediate Tax Free Fund A
Minnesota Tax Free Fund A
Missouri Tax Free Fund A
Tax Free Fund A
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
69
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.
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 period ended June 30, 2006, and
the fiscal years ended June 30, 2007 and June 30, 2008:
FISCAL PERIOD FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008
------------- ------------- -------------
Core Bond Fund $ 3,545 $ 1,352 $ --
High Income Bond Fund 15,449 36,147 38,569
Inflation Protected Securities Fund 331 8,805 2,888
Intermediate Government Bond Fund -- -- --
70
Intermediate Term Bond Fund 2,029 1,775 --
Short Term Bond Fund -- 1,131 --
Total Return Bond Fund 6,363 37,148 26,392
U.S. Government Mortgage Fund -- 342 --
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 -- -- --
----------
-- No commissions paid.
At June 30, 2008, certain Funds held the securities of their "regular
brokers or dealers" as follows:
REGULAR BROKER OR AMOUNT OF
DEALER ISSUING SECURITIES HELD
FUND SECURITIES BY FUND (000) TYPE OF SECURITIES
---- ----------------- --------------- ---------------------
Core Bond Merrill Lynch $ 9,491 Corporate Obligations
Morgan Stanley 15,119 Corporate Obligations
Inflation Protected Securities Merrill Lynch $ 1,477 Corporate Obligations
Intermediate Term Bond CS First Boston $ 6,112 Corporate Obligations
Merrill Lynch 4,859 Corporate Obligations
Morgan Stanley 6,491 Corporate Obligations
Short Term Bond Goldman Sachs $ 2,637 Corporate Obligations
Morgan Stanley 3,871 Corporate Obligations
Total Return Bond Merrill Lynch $ 2,448 Corporate Obligations
Morgan Stanley 5,330 Corporate Obligations
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 6, 2008, the directors and officers of FAIF as a group
owned less than 1% of each Fund's outstanding shares and the Funds were aware
that the following persons owned of record 5% or more of the outstanding shares
of each class of stock of the Funds:
71
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
ARIZONA TAX FREE
MS&CO FBO 14.00%
TAYLOR TRUST FARMS LLC A
PARTNERSHIP
ROBERT W MOORE MGR
PO BOX 128
WADDELL AZ 85355-0128
RAMESH C PATRI 5.70%
4733 E QUARTZ MOUNTAIN RD
PARADISE VLY AZ 85253-3202
SCOTT TRUST 5.20%
MARIAN G SCOTT TR
U/A 04/17/2000
4507 191ST PL NE
SAMMAMISH WA 98074-4633
UBS FINANCIAL SERVICES INC. FBO 5.07%
MARIAN HATFIELD TTEE
JMA SUBTRUST
U/A DTD 06/30/99
9411 W KERRY LN
PEORIA AZ 85382-3691
WILLIAM BLAIR & CO. L.L.C. 15.29%
MARTHA ELFRIEDE BROWN
222 W ADAMS STREET
CHICAGO IL 60606-5312
MS&CO FBO 13.21%
THOMAS A STEELE TTEE
SARABELLE STEELE REV
LIV TR U/A DTD 4/24/2001
17 HARBORVIEW DR
RYE NH 03870-6119
MS&CO FBO 9.30%
LOIS A DOYLE TTEE
LOIS ANNE DOYLE TR U/A
DTD 07/21/1994
9608 W PINERIDGE DR
SUN CITY AZ 85351-2443
FIRST CLEARING, LLC 8.53%
DONALD L FLAMM REV TRUST TRUST
DONALD L FLAMM TTEE
6115 LINCOLN DR APT 355
EDINA MN 55436-1630
WELLS FARGO INVESTMENTS LLC 7.49%
625 MARQUETTE AVE S 13TH FLOOR
MINNEAPOLIS MN 55402-2323
NFS LLC FEBO 6.76%
HARRIET B MARTIN REVOCABLE LIVIN
HARRIET MARTIN
U/A 10/22/07
5401 W DAILEY ST APT 3111
GLENDALE AZ 85306-4773
FIRST CLEARING, LLC 6.66%
THE ROBERT P COURSEY TRUST
7231 E BROADWAY RD APT 121
MESA AZ 85208-9218
72
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
BAND & CO 69.44%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 18.67%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 11.89%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CALIFORNIA INTERMEDIATE TAX FREE
LPL FINANCIAL 7.87%
9785 TOWNE CENTRE DR
SAN DIEGO CA 92121-1968
UBS FINANCIAL SERVICES INC. FBO 7.70%
LINBROOK TILE, INC.
1656 S STATE COLLEGE BLVD
ANAHEIM CA 92806-6021
U.S. BANCORP INVESTMENTS INC. 7.20%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 5.92%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
BAND & CO 79.72%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 16.74%
PO BOX 1787
MILWAUKEE WI 53201-1787
CALIFORNIA TAX FREE
U.S. BANCORP INVESTMENTS INC 12.41%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
US BANCORP INVESTMENTS INC. 7.03%
60 LIVINGSTON AVE
ST PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 11.48%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 11.29%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 10.59%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
73
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
MERRILL LYNCH PIERCE FENNER & SMITH 5.50%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
MSANDCO FBO 5.30%
C R BROWN & J BROWN TTEE
BROWN FAMILY TRUST U/A
DTD 09/13/1995
79765 LIGA
LAQUINTA CA 92253-4578
BAND & CO 85.14%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 11.17%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
COLORADO INTERMEDIATE TAX FREE
MERRILL LYNCH PIERCE FENNER & SMITH 11.15%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
BAND & CO 81.42%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 13.34%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
COLORADO TAX FREE
UBS FINANCIAL SERVICES INC. FBO 8.06%
M B E LIMITED PARTNERSHIP
C/O DON DITMARS
A PARTNERSHIP
PO BOX 126
CASTLE ROCK CO 80104-0126
BAND & CO 64.43%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
NFS LLC FEBO 19.58%
ALLIANCE BANK NA
ALLIANCE BANK TRUST DEPARTMENT
160 MAIN ST
ONEIDA NY 13421-1629
WASHINGTON & CO 12.45%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CORE BOND
74
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
ORCHARD TRUST CO LLC TRUSTEE/C 7.03%
FBO RETIREMENT PLANS
8515 E ORCHARD RD 2T2
GREENWOOD VLG CO 80111-5002
ORCHARD TRUST CO LLC TRUSTEE/C 13.51%
FBO RETIREMENT PLANS
8515 E ORCHARD RD 2T2
GREENWOOD VLG CO 80111-5002
BAND & CO 59.24%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 12.71%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 12.20%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
ORCHARD TRUST CO LLC TRUSTEE/C 7.68%
FBO RETIREMENT PLANS
8515 E ORCHARD RD 2T2
GREENWOOD VLG CO 80111-5002
US BANK CUST 6.74%
US BANCORP CAP
U/A 01-01-1984
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2575
MG TRUST COMPANY TRUSTEE 39.77%
MICHIGAN EDUCATIONAL PERSONNEL
SERV
700 17TH STREET
SUITE 300
DENVER CO 80202-3531
MG TRUST 20.91%
SHUMATE TRI-CITY LLC 401K
700 17TH ST STE 300
DENVER CO 80202-3531
INTERNATIONAL CLEARING TRUST CO 10.36%
TR AMERICAN MEDICAL
IDENTIFICATIONS
LTD LLP PSP
6940 COLUMBIA GATEWAY DR STE 200
COLUMBIA MD 21046-2876
MG TRUST CO CUST FBO 9.38%
IVERSEN & BIONDO ASSOCIATES INC
401K
700 17TH ST STE 300
DENVER CO 80202-3531
75
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
MG TRUST COMPANY CUST. FBO 5.58%
M. LONDON, INC. 401K
401K
700 17TH ST STE 300
DENVER CO 80202-3531
HIGH INCOME BOND
BAND & CO 75.81%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 12.75%
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 9.93%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
U S BANCORP INVESTMENTS INC 73.71%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
MG TRUST COMPANY CUST. FBO 15.59%
JOHNSON-QUAID VENTURES, LLC
700 17TH ST STE 300
DENVER CO 80202-3531
INFLATION PROTECTED SECURITIES
NFS LLC FEBO 11.62%
ALEXANDER PRIMAK JEWELRY INC
2 W 47TH ST
NEW YORK NY 10036-3319
U.S. BANCORP INVESTMENTS INC. 7.48%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
MERRILL LYNCH PIERCE FENNER & SMITH 23.53%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
FIRST CLEARING LLC 10.16%
MICHELLE J PERRY
85 FULTON ST
WEEHAWKEN NJ 07086-7060
U S BANCORP INVESTMENTS INC 9.41%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
PERSHING LLC 9.40%
PO BOX 2052
JERSEY CITY NJ 07303-2052
U S BANCORP INVESTMENTS INC 8.68%
60 LIVINGSTON AVE
ST PAUL MN 55107-2292
76
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
U S BANCORP INVESTMENTS INC 6.33%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
BAND & CO 65.13%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 16.16%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 13.43%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
PIMS/PRUDENTIAL RETIREMENT 99.90%
AS NOMINEE FOR THE TTEE/CUST PL 007
PBC MANAGEMENT, INC.
1148 BROADWAY
3RD FLOOR MAIN OFFICE
COLUMBUS GA 31901
INTERMEDIATE GOVERNMENT BOND
AMERITRADE INC 23.10%
PO BOX 2226
OMAHA NE 68103-2226
MERRILL LYNCH PIERCE FENNER & SMITH 10.23%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
TRUSTLYNX & CO 7.49%
TRUSTLYNX
PO BOX 173736
DENVER CO 80217-3736
US BANK CUST 50.38%
US BANCORP CAP
U/A 01-01-1984
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2575
BAND & CO 20.19%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 14.58%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 13.59%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
INTERMEDIATE TAX FREE
77
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
UNIFIED TRUST COMPANY NA 7.02%
OMNIBUS TRUST
2353 ALEXANDRIA DR STE 100
LEXINGTON KY 40504-3208
ROBERT W BAIRD & CO. INC. 6.06%
777 EAST WISCONSIN AVENUE
MILWAUKEE WI 53202-5300
BAND & CO 63.19%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 27.54%
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 8.77%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
INTERMEDIATE TERM BOND
ORCHARD TRUST CO LLC TRUSTEE/C 12.72%
FBO RETIREMENT PLANS
8515 E ORCHARD RD 2T2
GREENWOOD VLG CO 80111-5002
BAND & CO 55.25%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 22.13%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 15.21%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
MINNESOTA INTERMEDIATE TAX FREE
PERSHING LLC 8.72%
PO BOX 2052
JERSEY CITY NJ 07303-2052
US BANCORP INVESTMENTS INC 7.93%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
PERSHING LLC 5.55%
PO BOX 2052
JERSEY CITY NJ 07303-2052
78
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
ALFRED P GALE 5.48%
2350 HIGHLAND RD
MAPLE PLAIN MN 55359-9570
BAND & CO 92.40%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
MINNESOTA TAX FREE
MERRILL LYNCH PIERCE FENNER & SMITH 9.64%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
BAND & CO 92.39%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
MISSOURI TAX FREE
PERSHING LLC 41.32%
PO BOX 2052
JERSEY CITY NJ 07303-2052
U S BANCORP INVESTMENTS INC 33.13%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
CO FBO 8.03%
MILDRED W ROBERTS
512 E 109TH TER
KANSAS CITY MO 64131-4003
U.S. BANCORP INVESTMENTS INC. 5.84%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
UBS FINANCIAL SERVICES INC. FBO 5.25%
JOSEPH M MALTERS
KATHRYN KIRK-MALTERS TRUST
10685 LARSON LN
ROLLA MO 65401-8108
BAND & CO 88.89%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 8.56%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
NEBRASKA TAX FREE
RICHARD H WARMAN 18.96%
TOD
4641 N 56TH ST
LINCOLN NE 68504-1716
79
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
RBC CAPITAL MARKETS CORP FBO 16.50%
J JOHN GRAINGER
2929 VAN DORN ST
LINCOLN NE 68502-4261
A G EDWARDS & SONS INC 14.83%
W J & S A MOHANNA TTEES
W J M TR UAD 5/23/05
1 N JEFFERSON AVE
SAINT LOUIS MO 63103-2287
US BANCORP INVESTMENTS INC 11.83%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
MERRILL LYNCH PIERCE FENNER & SMITH 9.69%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
WELLS FARGO INVESTMENTS LLC 6.38%
625 MARQUETTE AVE S 13TH FLOOR
MINNEAPOLIS MN 55402-2323
BAND & CO 77.02%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 14.19%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 6.11%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
OHIO TAX FREE
U.S. BANCORP INVESTMENTS INC. 32.32%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 14.70%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
MERRILL LYNCH PIERCE FENNER & SMITH 10.36%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
U S BANCORP INVESTMENTS INC 9.69%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 8.36%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 37.29%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
80
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
ROBERT W BAIRD & CO INC 22.90%
777 EAST WISCONSIN AVENUE
MILWAUKEE WI 53202-5300
RAYMOND JAMES & ASSOC INC 17.94%
FBO EDWIN H TASSET &
MARILYN J TASSET TTEE
TASSET & MARILYN J TASSET TRUST
5970 WILMER RD
CINCINNATI OH 45247-5930
PERSHING LLC 16.10%
PO BOX 2052
JERSEY CITY NJ 07303-2052
BAND & CO 83.08%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 14.20%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
OREGON INTERMEDIATE TAX FREE
PIPER JAFFRAY 10.92%
800 NICOLLET MALL 8TH STREET
MINNEAPOLIS MN 55402
U.S. BANCORP INVESTMENTS INC. 7.13%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
BAND & CO 51.06%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 47.23%
PO BOX 1787
MILWAUKEE WI 53201-1787
SHORT TAX FREE
U.S. BANCORP INVESTMENTS INC. 24.68%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 14.99%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
MERRILL LYNCH PIERCE FENNER & SMITH 11.34%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
U S BANCORP INVESTMENTS INC 5.90%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
U.S. BANCORP INVESTMENTS INC. 5.20%
60 LIVINGSTON AVE
SAINT PAUL MN 55107-2292
81
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
BAND & CO 61.63%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 32.90%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
SHORT TERM BOND
BAND & CO 48.89%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 23.67%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 19.31%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
TAX FREE
A G EDWARDS & SONS INC 5.15%
ROBIN MELVA ANDERSON
1 N JEFFERSON AVE
SAINT LOUIS MO 63103-2287
MERRILL LYNCH PIERCE FENNER & SMITH 28.20%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
NFS LLC FEBO 6.40%
IONE R DILLEY TTEE
KENNETH P DILLEY REVOC TRUST
U/A 4/8/97
2092 NW 134TH ST
CLIVE IA 50325-7507
RAYMOND JAMES & ASSOC INC 5.21%
FBO MARY S WHALEY
POLLY P CARTER &
WILLIAM H STEVENS JR TTEE
1730 SAINT JAMES CIR
THE VILLAGES FL 32162-7651
FIRST CLEARING, LLC 5.08%
ETHEL PEDERSON TRUST
ETHEL PEDERSON TTEE
1632 168TH PL NE
BELLEVUE WA 98008-2910
BAND & CO 83.68%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 12.01%
PO BOX 1787
MILWAUKEE WI 53201-1787
82
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
TOTAL RETURN BOND
MERRILL LYNCH PIERCE FENNER & SMITH 14.09%
ATTN PHYSICAL TEAM
4800 DEER LAKE DR E
JACKSONVILLE FL 32246-6484
CHARLES SCHWAB & CO INC 5.36%
SPECIAL CUSTODY ACCT FBO
CUSTOMERS
ATTN MUTUAL FUNDS
101 MONTGOMERY ST
SAN FRANCISCO CA 94104-4151
BAND & CO 62.86%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 27.31%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 8.73%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
MG TRUST CO CUST FBO 57.46%
OMAHA NEON SIGN INC
700 17TH ST STE 300
DENVER CO 80202-3531
MG TRUST CO CUST FBO 12.16%
WATERMAN EXECUTIVE SEARCH 401K
700 17TH ST STE 300
DENVER CO 80202-3531
MG TRUST 7.81%
MARACOM CORP 401K
700 17TH ST STE 300
DENVER CO 80202-3531
U.S. GOVERNMENT MORTGAGE
ORCHARD TRUST CO LLC TRUSTEE/C 5.53%
FBO RETIREMENT PLANS
8515 E ORCHARD RD 2T2
GREENWOOD VLG CO 80111-5002
BAND & CO 66.65%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
CAPINCO 16.19%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
WASHINGTON & CO 12.65%
C/O US BANK
PO BOX 1787
MILWAUKEE WI 53201-1787
83
PERCENTAGE OF OUTSTANDING SHARES
-----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS R
------- ------- ------- ------- -------
COUNSEL TRUST DBA MATC FBO 8.26%
OMNI METAL FINISHING INC 401K PSP & TRUST
1251 WATERFRONT PL STE 525
PITTSBURGH PA 15222-4228
MG TRUST CO CUST FBO 7.82%
LEBLANC & ASSOCIATES 401K RETIRE
700 17TH ST STE 300
DENVER CO 80202-3531
ROBERT K LUCAS FBO 7.55%
LUCAS GENERAL CONTRACTING CORP
401 K PROFIT SHARING PLAN & TRUST
1111 QUAIL ST
NEWPORT BEACH CA 92660-2705
COUNSEL TRUST DBA MATC FBO 7.19%
GENEA ENERGY PARTNERS INC 401K PSP & TRUST
1251 WATERFRONT PL STE 525
PITTSBURGH PA 15222-4228
STEVE BARNES FBO 6.03%
BARNES FIRM 401K PSP & TRUST
17 COURT STREET SUITE 700
BUFFALO NY 14202-3204
COUNSEL TRUST DBA MATC FBO 5.77%
CHILD CARE CONNECTION INC 401K PSP & TRUST
1251 WATERFRONT PL STE 525
PITTSBURGH PA 15222-4228
JOSEPH ZENGER FBO 5.48%
ZENGER GROUP INC 401K PSP & TRUST
525 HERTEL AVE
BUFFALO NY 14207-2305
COUNSEL TRUST DBA MATC FBO 5.43%
PRINCIPAL TECHNICAL SERVICES I
401 K PROFIT SHARING PLAN & TRUST
1251 WATERFRONT PL STE 525
PITTSBURGH PA 15222-4228
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, 2008 was as set forth below. Please note
that the public offering prices of Class B, Class C, Class R and Class Y Shares
are the same as net asset value since no sales charges are imposed on the
purchase of such shares.
84
PUBLIC OFFERING PRICE
FUND CLASS A
---- ---------------------
Core Bond Fund $11.34
High Income Bond Fund 9.03
Inflation Protected Securities Fund 10.65
Intermediate Government Bond Fund 8.61
Intermediate Term Bond Fund 10.13
Short Term Bond Fund 10.12
Total Return Bond Fund 10.34
U.S. Government Mortgage Fund 10.59
Arizona Tax Free Fund 10.89
California Intermediate Tax Free Fund 10.22
California Tax Free Fund 11.19
Colorado Intermediate Tax Free Fund 10.42
Colorado Tax Free Fund 10.74
Intermediate Tax Free Fund 10.75
Minnesota Intermediate Tax Free Fund 9.97
Minnesota Tax Free Fund 10.95
Missouri Tax Free Fund 11.91
Nebraska Tax Free Fund 10.51
Ohio Tax Free Fund 10.46
Oregon Intermediate Tax Free Fund 9.90
Short Tax Free Fund 10.02
Tax Free Fund 10.72
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, 2008, 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 $ 94,571,118 8,707,147 $10.86
Class B 7,732,967 717,798 10.77
Class C 4,383,158 404,833 10.83
Class R 288,530 26,505 10.89
Class Y 1,468,598,935 135,256,706 10.86
HIGH INCOME BOND FUND
Class A 24,419,926 2,823,009 8.65
Class B 3,496,024 406,147 8.61
Class C 6,490,049 753,295 8.62
Class R 184,267 20,974 8.79
Class Y 204,163,961 23,588,159 8.66
INFLATION PROTECTED SECURITIES FUND
Class A 3,293,871 322,773 10.20
Class C 365,159 35,866 10.18
Class R 1,175,028 115,157 10.20
Class Y 278,748,935 27,318,001 10.20
INTERMEDIATE GOVERNMENT BOND FUND
Class A 6,504,487 772,767 8.42
Class Y 63,783,675 7,578,802 8.42
INTERMEDIATE TERM BOND FUND
Class A 28,363,640 2,864,006 9.90
Class Y 766,932,470 77,718,878 9.87
85
SHARES NET ASSET
NET ASSETS OUTSTANDING VALUE PER SHARE
-------------- ----------- ---------------
SHORT TERM BOND FUND
Class A 59,932,784 6,060,579 9.89
Class Y 257,403,037 26,018,027 9.89
TOTAL RETURN BOND FUND
Class A 15,566,745 1,572,666 9.90
Class B 2,383,872 241,746 9.86
Class C 3,672,999 373,234 9.84
Class R 293,544 29,503 9.95
Class Y 1,069,211,317 108,060,194 9.89
U.S. GOVERNMENT MORTGAGE FUND
Class A 11,295,032 1,114,187 10.14
Class B 3,736,521 367,916 10.16
Class C 2,258,500 223,700 10.10
Class R 1,585,280 156,626 10.12
Class Y 123,436,338 12,174,419 10.14
ARIZONA TAX FREE FUND
Class A 6,704,362 642,881 10.43
Class C 1,376,101 132,127 10.41
Class Y 17,522,323 1,679,268 10.43
CALIFORNIA INTERMEDIATE TAX FREE FUND
Class A 4,462,902 446,537 9.99
Class Y 52,924,481 5,284,041 10.02
CALIFORNIA TAX FREE FUND
Class A 12,076,031 1,127,884 10.71
Class C 2,479,775 231,330 10.72
Class Y 30,484,856 2,846,466 10.71
COLORADO INTERMEDIATE TAX FREE FUND
Class A 6,199,206 608,610 10.19
Class Y 43,932,874 4,324,553 10.16
COLORADO TAX FREE FUND
Class A 5,815,248 565,878 10.28
Class C 2,858,935 278,780 10.26
Class Y 15,888,597 1,543,355 10.29
INTERMEDIATE TAX FREE FUND
Class A 27,553,614 2,622,261 10.51
Class Y 630,820,068 60,157,623 10.49
MINNESOTA INTERMEDIATE TAX FREE FUND
Class A 22,058,693 2,263,171 9.75
Class Y 175,681,170 18,124,448 9.69
MINNESOTA TAX FREE FUND
Class A 102,089,002 9,740,731 10.48
Class C 20,061,472 1,922,273 10.44
Class Y 44,992,808 4,298,531 10.47
MISSOURI TAX FREE FUND
Class A 23,135,281 2,029,897 11.40
Class C 406,210 35,743 11.36
Class Y 137,745,894 12,080,177 11.40
NEBRASKA TAX FREE FUND
Class A 5,688,612 565,246 10.06
Class C 1,798,440 180,034 9.99
Class Y 29,533,416 2,935,510 10.06
OHIO TAX FREE FUND
Class A 634,894 63,372 10.02
Class C 254,598 25,750 9.89
Class Y 48,510,541 4,844,686 10.01
86
SHARES NET ASSET
NET ASSETS OUTSTANDING VALUE PER SHARE
-------------- ----------- ---------------
OREGON INTERMEDIATE TAX FREE FUND
Class A 5,966,445 616,555 9.68
Class Y 120,800,315 12,477,536 9.68
SHORT TAX FREE FUND
Class A 2,308,581 235,908 9.79
Class Y 143,984,908 14,712,819 9.79
TAX FREE FUND
Class A 35,556,382 3,466,705 10.26
Class C 3,104,279 304,135 10.21
Class Y 448,774,363 43,707,538 10.27
TAXATION
Each Fund intends to fulfill the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), to qualify 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.
87
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
"Purchasing, Redeeming, and 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
the 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.
On May 19, 2008, the U.S. Supreme Court decided the case of Department
of Revenue of Kentucky v. Davis, in which a taxpayer had challenged Kentucky's
scheme of taxation under which it exempted from taxation interest on the bonds
of the Commonwealth of Kentucky and its political subdivisions while subjecting
to tax interest on bonds of other states and their political subdivisions. The
Supreme Court held that Kentucky's taxing scheme did not violate the Commerce
Clause. The Court, however, dealt with bonds of the state and its political
subdivisions that financed governmental projects, and noted that the case did
not present the question of the treatment of private activity bonds that are
used to finance projects for private entities. (The Court's opinion also did not
address the issue of discriminatory treatment of Indian tribal bonds.) The
Court's opinion left open the possibility that another party could challenge a
state's discriminatory treatment of the interest on private activity bonds on
the ground that it violates the Commerce Clause. The management of the Funds is
not aware that any such case has been brought. Nevertheless, a court in the
future could hold that a state's discriminatory treatment of private activity
bonds of issuers located within or outside the state violates the Commerce
Clause, and in that case the 1995 Minnesota legislative provision could take
effect and
88
interest on certain Minnesota obligations held by the Minnesota Intermediate Tax
Free Fund and Minnesota Tax Free Fund would become taxable in Minnesota.
ADDITIONAL INFORMATION ABOUT CERTAIN SHAREHOLDER SERVICES
REDUCING CLASS A SALES CHARGES
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) 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) 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 intermediary 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 or Class C shares in the Funds or other
First American funds (other than money market funds) over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the Funds' custodian to hold a percentage equal to the 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 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. Absent complete
and current notification from the investor or from his or financial intermediary
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.
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 intermediary 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 intermediary 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
intermediary 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
89
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.
CLASS A SHARES 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 intermediary 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.
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 intermediary 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 intermediary (less the amount of any applicable contingent
deferred sales charge). Redemption requests must be received by the financial
intermediary by the time specified by the intermediary 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
intermediary 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 intermediaries 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
intermediary.
Shareholders who did not purchase their shares of a Fund through a
financial intermediary 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.
REDEEMING SHARES BY MAIL
Any shareholder may redeem Fund shares by sending a written request to
the Administrator, shareholder servicing agent, financial intermediary 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 intermediary 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.
90
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.
RECEIPT OF ORDERS BY FINANCIAL INTERMEDIARIES
The Funds have authorized one or more Intermediaries to receive
purchase and redemption orders on the Funds' behalf. Intermediaries are
authorized to designate other intermediaries to receive purchase and redemption
orders on the Funds' behalf. A Fund will be deemed to have received a purchase
or redemption order when an authorized Intermediary or, if applicable, an
Intermediary's authorized designee, receives the order. An order will be priced
at the applicable Fund's net asset value next computed after the order is
received by an authorized Intermediary or the Intermediary's authorized designee
and accepted by the Fund.
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.
RESEARCH REQUESTS
The Funds reserve the right, upon notice, to charge you a fee to cover
the costs of special requests for information that require extensive research or
employee resources. Such requests could include a request for historical account
transcripts or the retrieval of a significant number of documents.
FINANCIAL STATEMENTS
The financial statements of FAIF included in its Annual Report to
shareholders for the fiscal year ended June 30, 2008 are incorporated herein by
reference.
91
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.
1
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.
2
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.
3
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.
4
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: o 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.
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APPENDIX B
FAF ADVISORS, INC.
PROXY VOTING POLICIES AND PROCEDURES
GENERAL PRINCIPLES
FAF Advisors, Inc. ("FAF Advisors") is the investment adviser for the First
American family of mutual funds (the "Funds") and for institutional and other
separately managed accounts (collectively, with the Funds, "Client Accounts").
As such, Client Accounts may confer upon FAF Advisors complete discretion to
vote proxies. It is FAF Advisors' duty to vote proxies in the best interests of
its clients. In voting proxies, FAF Advisors also seeks to maximize total
investment return for its clients.
In the event that FAF Advisors contracts with another investment adviser to act
as a sub-adviser for a Client Account, FAF Advisors may delegate proxy voting
responsibility to the sub-adviser. Where FAF has delegated proxy voting
responsibility, the sub-adviser will be responsible for developing and adhering
to its own proxy voting policies. FAF Advisors will approve a sub-adviser's
proxy voting policies, and will review these policies at least annually.
FAF Advisors' Investment Policy Committee ("IPC"), comprised of the firm's most
senior investment professionals, is charged with oversight of the proxy voting
policies and procedures. The IPC is responsible for (1) approving the proxy
voting policies and procedures, and (2) oversight of the activities of FAF
Advisors' Proxy Voting Administration Committee ("PVAC"). The PVAC is
responsible for providing an administrative framework to facilitate and monitor
FAF Advisors' exercise of its fiduciary duty to vote client proxies and fulfill
the obligations of reporting and recordkeeping under the federal securities
laws.
POLICIES
The IPC, 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 Institutional Shareholder Services, Inc.
("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. These
policies are reviewed periodically by ISS, and therefore are subject to change.
Even though it has adopted ISS' policies, FAF Advisors maintains the fiduciary
responsibility for all proxy voting decisions.
PROCEDURES
A. Supervision of Proxy Voting Service
The PVAC shall supervise the relationship with FAF Advisors' proxy voting
service, ISS. ISS apprises FAF Advisors of shareholder meeting dates, provides
research on proxy proposals and voting recommendations, and casts the actual
proxy votes. ISS also serves as FAF Advisors' proxy voting record keeper and
generates reports on how proxies were voted.
B. Conflicts of Interest
As an affiliate of U.S. Bancorp, a large multi-service financial institution,
FAF Advisors recognizes that there are circumstances 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 may have personal or familial relationships with the U.S. Bancorp
enterprise and/or its employees that could give rise to potential conflicts of
interest.
FAF Advisors will vote proxies in the best interest of its clients regardless of
such real or perceived conflicts of interest. By adopting ISS' policies, FAF
Advisors believes the risk related to conflicts will be minimized.
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To further minimize this risk, the IPC will review ISS' conflict avoidance
policy at least annually to ensure that it adequately addresses both the actual
and perceived conflicts of interest the proxy voting service may face.
In the event that ISS faces a material conflict of interest with respect to a
specific vote, the PVAC shall direct ISS how to vote. The PVAC shall receive
voting direction from the Head of Equity Research, who will seek voting
direction from appropriate investment personnel. Before doing so, however, the
PVAC will confirm that FAF Advisors faces no material conflicts of its own with
respect to the specific proxy vote.
If the PVAC concludes that a material conflict does exist, it will recommend to
the IPC a course of action designed to address the conflict. Such actions could
include, but are not limited to:
1. Obtaining instructions from the affected client(s) on how to vote
the proxy;
2. Disclosing the conflict to the affected client(s) and seeking
their consent to permit FAF Advisors to vote the proxy;
3. Voting in proportion to the other shareholders;
4. Recusing an IPC 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
5. Following the recommendation of a different independent third
party.
In addition to all of the above, members of the IPC and the PVAC must notify FAF
Advisors' Chief Compliance Officer of any direct, indirect or perceived improper
influence exerted 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 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 IPC shall not consider any improper influence in
determining how to vote proxies, and will vote in the best interests of clients.
C. Proxy Vote Override
From time to time, a Portfolio Manager may initiate action to override the ISS
recommendation for a particular vote. Any such override shall be reviewed by FAF
Advisors' Legal Department for material conflicts. If the Legal Department
determines that no material conflicts exist, the approval of one investment
professional on the IPC or the Head of Equity Research shall authorize the
override. If a material conflict exists then the override will not be
effectuated.
D. Securities Lending
In order to generate incremental revenue, some clients may participate in U.S.
Bank's securities lending program. If a client has elected to participate in the
lending program then it will not have the right to vote the proxies of any
securities that are on loan as of the shareholder meeting record date. A client,
or a Portfolio Manager, may place restrictions on loaning securities and/or
recall a security on loan at any time. Such actions must be affected prior to
the record date for a meeting if the purpose for the restriction or recall is to
secure the vote.
Portfolio Managers and/or Analysts who become aware of upcoming proxy issues
relating to any securities in portfolios they manage, or issuers they follow,
will consider the desirability of recalling the affected securities that are on
loan or restricting the affected securities prior to the record date for the
matter. If the proxy issue is determined to be material, and the determination
is made prior to the shareholder meeting record date the Portfolio Manager(s)
will contact the Securities Lending Department to recall securities on loan or
restrict the loaning of any security held in any portfolio they manage, if they
determine that it is in the best interest of shareholders to do so. Training
regarding the process to recall securities on loan or restrict the loaning of
securities is given to all Portfolio Managers and Analysts.
E. Proxy Voting for ERISA Clients
In the event that a proxy voting issue arises for an ERISA client, FAF Advisors
is prohibited from voting shares with respect to any issue advanced by a party
in interest, such as U.S. Bancorp or any of the First American Funds.
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F. Proxy Voting Records
As required by Rule 204-2 of the Investment Company Act of 1940, FAF Advisors
shall make and retain five types of records relating to proxy voting; (1) proxy
voting policies and procedures; (2) proxy statements received for client and
fund securities; (3) records of votes cast on behalf of clients and funds; (4)
records of written requests for proxy voting information and written responses
from the advisor to either a written or oral request; and (5) any documents
prepared by the advisor that were material to making a proxy voting decision or
that memorialized the basis for the decision. FAF Advisors may rely on ISS to
make and retain on our behalf records pertaining to the rule.
Each sub-advisor shall be responsible for making and retaining all proxy voting
records required by the rule and shall provide them to FAF Advisors upon
request.
G. Fund of Funds Provision
In instances where FAF Advisors provides investment advice to a fund of funds
that acquires shares of affiliated funds or three percent or more of the
outstanding voting securities of an unaffiliated fund, the acquiring fund shall
seek instructions from its shareholders as to how to vote shares of those
acquired funds, or to vote the shares in the same proportion as the vote of all
other shareholders of the acquired fund. If compliance with this policy results
in a vote of any shares in a manner different than the ISS recommendation, such
vote will not require compliance with the Proxy Vote Override procedures set
forth above.
H. Review and Reports
The PVAC shall maintain a review schedule. The schedule shall include reviews
for the proxy voting policy, the proxy voting record, account maintenance, and
other reviews as deemed appropriate by the PVAC. The PVAC shall review the
schedule at least annually.
The PVAC will report to the IPC with respect to all identified conflicts and how
they were addressed. These reports will include all Client Accounts, including
those that are sub-advised. With respect to the review of votes cast on behalf
of investments by the Funds, such review will also be reported to the Board of
Directors of the Funds at each of their regularly scheduled meetings.
I. Vote Disclosure to Shareholders
FAF Advisors shall disclose its proxy voting record on the Funds' website at
www.firstamericanfunds.com and/or on the SEC's website at www.sec.gov.
Additionally, shareholders can receive, on request, the voting records for the
Funds by calling a toll free number (1-800-677-3863).
FAF Advisors' institutional and 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 available includes
name of issuer, ticker/CUSIP, shareholder meeting date, description of item and
FAF Advisors' vote.
J. Form N-PX
FAF Advisors will cause Form N-PX to be filed with the Securities and Exchange
Commission, and ensure that any other proxy vote related filings as required by
regulation or contract are timely made.
ISS PROXY VOTING GUIDELINES SUMMARY
The following is a concise summary of ISS's proxy voting policy guidelines.
1. Auditors
AUDITOR RATIFICATION
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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;
- 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;
- Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- Fees for non-audit services ("other" fees) are excessive.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account:
- The tenure of the audit firm;
- The length of rotation specified in the proposal;
- Any significant audit-related issues at the company;
- The number of audit committee meetings held each year;
- The number of financial experts serving on the committee; and
- Whether the company has a periodic renewal process where the auditor
is evaluated for both audit quality and competitive price.
2. Board of Directors
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Vote AGAINST or WITHHOLD from individual directors who:
- Attend less than 75 percent of the board and committee meetings
without a valid excuse;
- Sit on more than six public company boards;
- Are CEOs of public companies who sit on the boards of more than two
public companies besides their own--withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
- The company's proxy indicates that not all directors attended 75
percent of the aggregate of their board and committee meetings, but
fails to provide the required disclosure of the names of the directors
involved. If this information cannot be obtained, vote
against/withhold from all incumbent directors;
- The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/withhold every year until this feature is
removed;
- The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of an newly public company, does not commit
to put the pill to a shareholder vote within 12 months following the
IPO), or reneges on a commitment to put the pill to a vote, and has
not yet received a withhold/against recommendation for this issue;
- The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
- The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
- The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
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- At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the underlying issue(s) that caused the high
withhold/against vote;
- The company is a Russell 3000 company that underperformed its industry
group (GICS group) under ISS' "Performance Test for Directors" policy;
- The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for
election--any or all appropriate nominees (except new) may be held
accountable.
Vote AGAINST or WITHHOLD from inside directors and affiliated outside directors
when:
- The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
- The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
- The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
- The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the audit committee if:
- The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
- Poor accounting practices are identified which rise to a level of
serious concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote AGAINST or WITHHOLD from the members of the compensation committee if:
- There is a negative correlation between the chief executive's pay and
company performance;
- The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
- The company fails to submit one-time transfers of stock options to a
shareholder vote;
- The company fails to fulfill the terms of a burn-rate commitment made
to shareholders;
- The company has backdated options (see "Options Backdating" policy);
- The company has poor compensation practices (see "Poor Pay Practices"
policy). Poor pay practices may warrant withholding votes from the CEO
and potentially the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
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.
CUMULATIVE VOTING
Generally vote AGAINST proposals to eliminate cumulative voting. Generally vote
FOR proposals to restore or provide for cumulative voting unless:
- The company has proxy access or a similar structure to allow
shareholders to nominate directors to the company's ballot; and
- The company has adopted a majority vote standard, with a carve-out for
plurality voting in situations where there are more nominees than
seats, and a director resignation policy to address failed elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting
power > 50 percent).
INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless there are compelling reasons to
recommend against the proposal, such as a counterbalancing governance structure.
This should include all the following:
- Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role
may alternatively reside with a presiding director,
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vice chairman, or rotating lead director; however the director must
serve a minimum of one year in order to qualify as a lead director.)
The duties should include, but are not limited to, the following:
- presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent
directors;
- serves as liaison between the chairman and the independent
directors;
- approves information sent to the board;
- approves meeting agendas for the board;
- approves meeting schedules to assure that there is sufficient
time for discussion of all agenda items;
- has the authority to call meetings of the independent directors;
- if requested by major shareholders, ensures that he is available
for consultation and direct communication;
- The company publicly discloses a comparison of the duties of its
independent lead director and its chairman;
- The company publicly discloses a sufficient explanation of why it
chooses not to give the position of chairman to the independent lead
director, and instead combine the chairman and CEO positions;
- Two-thirds independent board;
- All independent key committees;
- Established governance guidelines;
- The company should not have underperformed both its peers and index on
the basis of both one-year and three-year total shareholder returns*,
unless there has been a change in the chairman/CEO position within
that time; and
- The company does not have any problematic governance issues.
Vote FOR the proposal if the company does not provide disclosure with respect to
any or all of the bullet points above. If disclosure is provided, evaluate on a
CASE-BY-CASE basis.
* The industry peer group used for this evaluation is the average of the 12
companies in the same six-digit GICS group that are closest in revenue to
the company. To fail, the company must underperform its index and industry
group on all four measures (one- and three-year on industry peers and
index).
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats. Companies are strongly encouraged to also adopt a post-election
policy (also known as a director resignation policy) that will provide
guidelines so that the company will promptly address the situation of a holdover
director.
OPEN ACCESS
Vote shareholder proposals asking for open or proxy access on a CASE-BY-CASE
basis, taking into account:
- The ownership threshold proposed in the resolution;
- The proponent's rationale for the proposal at the targeted company in
terms of board and director conduct.
3. Proxy Contests
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
- Long-term financial performance of the target company relative to its
industry;
- Management's track record;
- Background to the proxy contest;
- Qualifications of director nominees (both slates);
- Strategic plan of dissident slate and quality of critique against
management;
- Likelihood that the proposed goals and objectives can be achieved
(both slates);
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- Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
- The election of fewer than 50 percent of the directors to be elected
is contested in the election;
- One or more of the dissident's candidates is elected;
- Shareholders are not permitted to cumulate their votes for directors;
and
- The election occurred, and the expenses were incurred, after the
adoption of this bylaw.
4. Takeover Defenses
POISON PILLS
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
- Shareholders have approved the adoption of the plan; or
- The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay that would result from
seeking stockholder approval (i.e., the "fiduciary out" provision). A
poison pill adopted under this fiduciary out will be put to a
shareholder ratification vote within 12 months of adoption or expire.
If the pill is not approved by a majority of the votes cast on this
issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a year after adoption. If the company has no non-shareholder approved
poison pill in place and has adopted a policy with the provisions outlined
above, vote AGAINST the proposal. If these conditions are not met, vote FOR the
proposal, but with the caveat that a vote within 12 months would be considered
sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
- No lower than a 20 percent trigger, flip-in or flip-over;
- A term of no more than three years;
- No dead-hand, slow-hand, no-hand, or similar feature that limits the
ability of a future board to redeem the pill;
- Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting, or
seek a written consent to vote on rescinding the pill.
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.
5. Mergers and Corporate Restructurings
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
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- Valuation - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
- Market reaction - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
- Strategic rationale - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
- Negotiations and process - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A fair
process helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
- Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The aggregate CIC figure may be a misleading
indicator of the true value transfer from shareholders to insiders.
Where such figure appears to be excessive, analyze the underlying
assumptions to determine whether a potential conflict exists.
- Governance - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
6. State of Incorporation
REINCORPORATION PROPOSALS
Vote CASE-BY-CASE on proposals to change a company's state of incorporation,
taking into consideration both financial and corporate governance concerns,
including:
- The reasons for reincorporating;
- A comparison of the governance provisions;
- Comparative economic benefits; and
- A comparison of the jurisdictional laws.
7. Capital Structure
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance using a model developed by ISS. 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.
In addition, for capital requests less than or equal to 300 percent of the
current authorized shares that marginally fail the calculated allowable cap
(i.e., exceed the allowable cap by no more than 5 percent), on a CASE-BY-CASE
basis, vote FOR the increase based on the company's performance and whether the
company's ongoing use of shares has shown prudence. Factors should include, at a
minimum, the following:
- Rationale;
- Good performance with respect to peers and index on a five-year total
shareholder return basis; Absence of non-shareholder approved poison
pill;
- Reasonable equity compensation burn rate;
- No non-shareholder approved pay plans; and
- Absence of egregious equity compensation practices.
DUAL-CLASS STOCK
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Vote AGAINST proposals to create a new class of common stock with superior
voting rights. 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 create a new class of
nonvoting or sub-voting 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.
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a non-shareholder approved shareholder rights plan
(poison pill).
PREFERRED STOCK
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock), and AGAINST proposals to increase the
number of blank check preferred stock authorized for issuance when no shares
have been issued or reserved for a specific purpose. Vote FOR proposals to
create "declawed" blank check preferred stock (stock that cannot be used as a
takeover defense), and FOR proposals to authorize preferred stock in cases where
the company specifies the voting, dividend, conversion, and other rights of such
stock and the terms of the preferred stock appear reasonable. Vote CASE-BY-CASE
on proposals to increase the number of blank check preferred shares after
analyzing the number of preferred shares available for issue given a company's
industry and performance in terms of shareholder returns.
8. Executive and Director Compensation
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
- The total cost of the company's equity plans is unreasonable;
- The plan expressly permits the repricing of stock options without
prior shareholder approval;
- There is a disconnect between CEO pay and the company's performance;
- The company's three year burn rate exceeds the greater of 2% and the
mean plus one standard deviation of its industry group; or
- The plan is a vehicle for poor pay practices.
POOR PAY PRACTICES
Vote AGAINST or WITHHOLD from compensation committee members, the CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices:
- Egregious employment contracts (e.g., multi-year guarantees for salary
increases, bonuses, and equity compensation);
- Excessive perks (overly generous cost and/or reimbursement of taxes
for personal use of corporate aircraft, personal security systems
maintenance and/or installation, car allowances, and/or other
excessive arrangements relative to base salary);
- Abnormally large bonus payouts without justifiable performance linkage
or proper disclosure (e.g., performance metrics that are changed,
canceled, or replaced during the performance period without adequate
explanation of the action and the link to performance);
- Egregious pension/SERP (supplemental executive retirement plan)
payouts (inclusion of additional years of service not worked that
result in significant payouts, or inclusion of performance-based
equity awards in the pension calculation;
- New CEO with overly generous new hire package (e.g., excessive "make
whole" provisions);
- Excessive severance and/or change-in-control provisions: Inclusion of
excessive change-in-control or severance payments, especially those
with a multiple in excess of 3X cash pay;
- Severance paid for a "performance termination," (i.e., due to the
executive's failure to perform job functions at the appropriate
level);
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- Change-in-control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- Perquisites for former executives such as car allowances,
personal use of corporate aircraft, or other inappropriate
arrangements;
- Poor disclosure practices, (unclear explanation of how the CEO is
involved in the pay setting process, retrospective performance targets
and methodology not discussed, or methodology for benchmarking
practices and/or peer group not disclosed and explained);
- Internal pay disparity (e.g., excessive differential between CEO total
pay and that of next highest-paid named executive officer);
- Other excessive compensation payouts or poor pay practices at the
company.
DIRECTOR COMPENSATION
Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the
cost of the plans against the company's allowable cap.
On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans will
exceed the allowable cap. Vote for the plan if ALL of the following qualitative
factors in the board's compensation are met and disclosed in the proxy
statement:
- Director stock ownership guidelines with a minimum of three times the
annual cash retainer.
- Vesting schedule or mandatory holding/deferral period:
- A minimum vesting of three years for stock options or restricted
stock; or
- Deferred stock payable at the end of a three-year deferral
period.
- Mix between cash and equity:
- A balanced mix of cash and equity, for example 40 percent cash/60
percent equity or 50 percent cash/50 percent equity; or
- If the mix is heavier on the equity component, the vesting
schedule or deferral period should be more stringent, with the
lesser of five years or the term of directorship.
- No retirement/benefits and perquisites provided to non-employee
directors; and
- Detailed disclosure provided on cash and equity compensation delivered
to each non-employee director for the most recent fiscal year in a
table. The column headers for the table may include the following:
name of each non-employee director, annual retainer, board meeting
fees, committee retainer, committee-meeting fees, and equity grants.
EMPLOYEE STOCK PURCHASE PLANS--QUALIFIED PLANS
Vote CASE-BY-CASE on qualified employee stock purchase plans. 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
- The number of shares allocated to the plan is 10 percent or less of
the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
- Purchase price is less than 85 percent of fair market value; or
- Offering period is greater than 27 months; or
- The number of shares allocated to the plan is more than 10 percent of
the outstanding shares.
EMPLOYEE STOCK PURCHASE PLANS--NON-QUALIFIED PLANS
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
- Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
- Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
- Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
- No discount on the stock price on the date of purchase since there is
a company matching contribution.
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Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
OPTIONS BACKDATING
In cases where a company has practiced options backdating, vote AGAINST or
WITHHOLD on a CASE-BY-CASE basis from the members of the compensation committee,
depending on the severity of the practices and the subsequent corrective actions
on the part of the board. Vote AGAINST or WITHHOLD from the compensation
committee members who oversaw the questionable options practices or from current
compensation committee members who fail to respond to the issue proactively,
depending on several factors, including, but not limited to:
- Reason and motive for the options backdating issue (inadvertent vs.
deliberate grant date changes);
- Length of time of options backdating;
- Size of restatement due to options backdating;
- Corrective actions taken by the board or compensation committee, such
as canceling or repricing backdated options, or recoupment of option
gains on backdated grants;
- Adoption of a grant policy that prohibits backdating, and creation of
a fixed grant schedule or window period for equity grants going
forward.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options, considering:
- Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in-the-money" over the near
term;
- Rationale for the re-pricing--was the stock price decline beyond
management's control?
- Is this a value-for-value exchange?
- Are surrendered stock options added back to the plan reserve?
- Option vesting--does the new option vest immediately or is there a
black-out period?
- Term of the option--the term should remain the same as that of the
replaced option;
- Exercise price--should be set at fair market or a premium to market;
- Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's three-year average burn rate. In
addition to the above considerations, evaluate the intent, rationale, and timing
of the repricing proposal. The proposal should clearly articulate why the board
is choosing to conduct an exchange program at this point in time. Repricing
underwater options after a recent precipitous drop in the company's stock price
demonstrates poor timing. Repricing after a recent decline in stock price
triggers additional scrutiny and a potential AGAINST vote on the proposal. At a
minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-by-CASE on plans that provide participants with the option of taking
all or a portion of their cash compensation in the form of stock, and on plans
that do not provide a dollar-for-dollar cash for stock exchange. In cases where
the exchange is not dollar-for-dollar, the request for new or additional shares
for such equity program will be considered using the binomial option pricing
model. In an effort to capture the total cost of total compensation, ISS will
not make any adjustments to carve out the in-lieu-of cash compensation. Vote FOR
non-employee director-only equity plans that provide a dollar-for-dollar
cash-for-stock exchange.
TRANSFER PROGRAMS OF STOCK OPTIONS
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Vote AGAINST or WITHHOLD from compensation committee members if they fail to
submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
- Executive officers and non-employee directors are excluded from
participating;
- Stock options are purchased by third-party financial institutions at a
discount to their fair value using option pricing models such as
Black-Scholes or a Binomial Option Valuation or other appropriate
financial models;
- There is a two-year minimum holding period for sale proceeds (cash or
stock) for all participants.
Additionally, management should provide a clear explanation of why options are
being transferred and whether the events leading up to the decline in stock
price were beyond management's control. A review of the company's historic stock
price volatility should indicate if the options are likely to be back
"in-the-money" over the near term.
Vote AGAINST equity plan proposals if the details of ongoing Transfer of Stock
Options programs are not provided to shareholders. Since TSOs will be one of the
award types under a stock plan, the ongoing TSO program, structure and mechanics
must be disclosed to shareholders. The specific criteria to be considered in
evaluating these proposals include, but not limited, to the following:
- Eligibility;
- Vesting;
- Bid-price;
- Term of options;
- Transfer value to third-party financial institution, employees and the
company.
Amendments to existing plans that allow for introduction of transferability of
stock options should make clear that only options granted post-amendment shall
be transferable.
SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the named executive officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
COMPENSATION CONSULTANTS--DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote FOR shareholder proposals seeking disclosure regarding the
company, board, or compensation committee's use of compensation consultants,
such as company name, business relationship(s) and fees paid.
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS
Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company. Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation. Vote
AGAINST shareholder proposals requiring director fees be paid in stock only.
Vote CASE-BY-CASE on 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.
PAY FOR SUPERIOR PERFORMANCE
Generally vote FOR shareholder proposals based on a case-by-case analysis that
requests the board establish a pay-for-superior performance standard in the
company's compensation plan for senior executives. The proposal should have the
following principles:
- Sets compensation targets for the plan's annual and long-term
incentive pay components at or below the peer group median;
- Delivers a majority of the plan's target long-term compensation
through performance-vested, not simply time-vested, equity awards;
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- Provides the strategic rationale and relative weightings of the
financial and non-financial performance metrics or criteria used in
the annual and performance-vested long-term incentive components of
the plan;
- Establishes performance targets for each plan financial metric
relative to the performance of the company's peer companies;
- Limits payment under the annual and performance-vested long-term
incentive components of the plan to when the company's performance on
its selected financial performance metrics exceeds peer group median
performance.
Consider the following factors in evaluating this proposal:
- What aspects of the company's annual and long-term equity incentive
programs are performance-driven?
- If the annual and long-term equity incentive programs are performance
driven, are the performance criteria and hurdle rates disclosed to
shareholders or are they benchmarked against a disclosed peer group?
- Can shareholders assess the correlation between pay and performance
based on the current disclosure?
- What type of industry and stage of business cycle does the company
belong to?
PERFORMANCE-BASED AWARDS
Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical steps:
- First, vote FOR shareholder proposals advocating the use of
performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced
options, unless the proposal is overly restrictive or if the company
has demonstrated that it is using a "substantial" portion of
performance-based awards for its top executives. Standard stock
options and performance-accelerated awards do not meet the criteria to
be considered as performance-based awards. Further, premium-priced
options should have a premium of at least 25 percent and higher to be
considered performance-based awards.
- Second, assess the rigor of the company's performance-based equity
program. If the bar set for the performance-based program is too low
based on the company's historical or peer group comparison, generally
vote FOR the proposal. Furthermore, if target performance results in
an above target payout, vote FOR the shareholder proposal due to
program's poor design. If the company does not disclose the
performance metric of the performance-based equity program, vote FOR
the shareholder proposal regardless of the outcome of the first step
to the test.
In general, vote FOR the shareholder proposal if the company does not meet both
of these two requirements.
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote FOR shareholder proposals calling for certain principles
regarding the use of prearranged trading plans (10b5-1 plans) for executives.
These principles include:
- Adoption, amendment, or termination of a 10b5-1 plan must be disclosed
within two business days in a Form 8-K;
- Amendment or early termination of a 10b5-1 plan is allowed only under
extraordinary circumstances, as determined by the board;
- Ninety days must elapse between adoption or amendment of a 10b5-1 plan
and initial trading under the plan;
- Reports on Form 4 must identify transactions made pursuant to a 10b5-1
plan;
- An executive may not trade in company stock outside the 10b5-1 Plan.
- Trades under a 10b5-1 plan must be handled by a broker who does not
handle other securities transactions for the executive.
RECOUP BONUSES
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Vote on a CASE-BY-CASE on proposals to recoup unearned incentive bonuses or
other incentive payments made to senior executives if it is later determined
that fraud, misconduct, or negligence significantly contributed to a restatement
of financial results that led to the awarding of unearned incentive
compensation, taking into consideration:
- If the company has adopted a formal recoupment bonus policy; or
- If the company has chronic restatement history or material financial
problems.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote FOR shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts. Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden
parachutes. An acceptable parachute should include, but is not limited to, the
following:
- The triggering mechanism should be beyond the control of management;
- The amount should not exceed three times base amount (defined as the
average annual taxable W-2 compensation during the five years prior to
the change of control);
- Change-in-control payments should be double-triggered, i.e., (1) after
a change in control has taken place, and (2) termination of the
executive as a result of the change in control. Change in control is
defined as a change in the company ownership structure.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans. Generally vote FOR shareholder proposals requesting
to limit the executive benefits provided under the company's supplemental
executive retirement plan (SERP) by limiting covered compensation to a senior
executive's annual salary and excluding of all incentive or bonus pay from the
plan's definition of covered compensation used to establish such benefits.
9. Corporate Social Responsibility (CSR) Issues
CONSUMER LENDING
Vote CASE-BY CASE on requests for reports on the company's lending guidelines
and procedures, including the establishment of a board committee for oversight,
taking into account:
- Whether the company has adequately disclosed mechanisms to prevent
abusive lending practices;
- Whether the company has adequately disclosed the financial risks of
the lending products in question;
- Whether the company has been subject to violations of lending laws or
serious lending controversies;
- Peer companies' policies to prevent abusive lending practices.
PHARMACEUTICAL PRICING
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company evaluate their
product pricing considering:
- The existing level of disclosure on pricing policies;
- Deviation from established industry pricing norms;
- The company's existing initiatives to provide its products to needy
consumers;
- Whether the proposal focuses on specific products or geographic
regions.
PRODUCT SAFETY AND TOXIC MATERIALS
Generally vote FOR proposals requesting the company to report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic materials
and/or product safety in its supply chain, unless:
- The company already discloses similar information through existing
reports or policies such as a supplier code of conduct and/or a
sustainability report;
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- The company has formally committed to the implementation of a toxic
materials and/or product safety and supply chain reporting and
monitoring program based on industry norms or similar standards within
a specified time frame; and
- The company has not been recently involved in relevant significant
controversies or violations.
Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility
assessment to phase-out of certain toxic chemicals and/or evaluate and disclose
the financial and legal risks associated with utilizing certain chemicals,
considering:
- Current regulations in the markets in which the company operates;
- Recent significant controversy, litigation, or fines stemming from
toxic chemicals or ingredients at the company; and
- The current level of disclosure on this topic.
CLIMATE CHANGE
In general, vote FOR resolutions requesting that a company disclose information
on the impact of climate change on the company's operations unless:
- The company already provides current, publicly available information
on the perceived impact that climate change may have on the company as
well as associated policies and procedures to address such risks
and/or opportunities;
- The company's level of disclosure is comparable to or better than
information provided by industry peers; and
- There are no significant fines, penalties, or litigation associated
with the company's environmental performance.
GREENHOUSE GAS EMISSIONS
Generally vote FOR proposals requesting a report on greenhouse gas emissions
from company operations and/or products unless this information is already
publicly disclosed or such factors are not integral to the company's line of
business. Generally vote AGAINST proposals that call for reduction in greenhouse
gas emissions by specified amounts or within a restrictive time frame unless the
company lags industry standards and has been the subject of recent, significant
fines, or litigation resulting from greenhouse gas emissions.
POLITICAL CONTRIBUTIONS AND TRADE ASSOCIATIONS SPENDING
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
- The company is in compliance with laws governing corporate political
activities; and
- The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and not coercive.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions as such publications could present significant cost to
the company without providing commensurate value to shareholders. Vote
CASE-BY-CASE on proposals to improve the disclosure of a company's political
contributions and trade association spending, considering:
- Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
- The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
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SUSTAINABILITY REPORTING
Generally vote FOR proposals requesting the company to report on policies and
initiatives related to social, economic, and environmental sustainability,
unless:
- The company already discloses similar information through existing
reports or policies such as an environment, health, and safety (EHS)
report; a comprehensive code of corporate conduct; and/or a diversity
report; or
- The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame.
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