0000950137-08-013795.txt : 20130114
0000950137-08-013795.hdr.sgml : 20130114
20081118163215
ACCESSION NUMBER: 0000950137-08-013795
CONFORMED SUBMISSION TYPE: CORRESP
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20081118
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST AMERICAN INVESTMENT FUNDS INC
CENTRAL INDEX KEY: 0000820892
IRS NUMBER: 411418224
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: CORRESP
BUSINESS ADDRESS:
STREET 1: 333 WEST WACKER DR.
CITY: CHICAGO
STATE: IL
ZIP: 60606
BUSINESS PHONE: 312-917-8146
MAIL ADDRESS:
STREET 1: 333 WEST WACKER DR.
CITY: CHICAGO
STATE: IL
ZIP: 60606
FORMER COMPANY:
FORMER CONFORMED NAME: FIRST AMERICAN INVESTMENT FUNDS INC
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: SECURAL MUTUAL FUNDS INC
DATE OF NAME CHANGE: 19910627
CORRESP
1
filename1.txt
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%
(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%
(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.
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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;
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(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
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
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)
4.74% 9.36% 5.23% 5.40% 2.83% 4.33% 1.23%
2001 2002 2003 2004 2005 2006 2007
Best Quarter:
Quarter ended September 30, 2002 5.00%
Worst Quarter:
Quarter ended June 30, 2004 (2.54)%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 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%
(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)
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.
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)
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.
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)
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
Best Quarter:
Quarter ended September 30, 2002 4.23%
Worst Quarter:
Quarter ended June 30, 2004 (2.26)%
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%
(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)
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
Best Quarter:
Quarter ended September 30, 2002 4.86%
Worst Quarter:
Quarter ended June 30, 2004 (2.25)%
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07(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%
(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)
10.19% 4.97% 3.96% 3.02% 4.07% 1.67%
2002 2003 2004 2005 2006 2007
Best Quarter:
Quarter ended September 30, 2002 4.97%
Worst Quarter:
Quarter ended June 30, 2004 (2.34)%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 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%
(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)
4.89% 3.77% 2.64% 4.11% 2.25%
2003 2004 2005 2006 2007
Best Quarter:
Quarter ended September 30, 2004 4.12%
Worst Quarter:
Quarter ended June 30, 2004 (2.50)%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 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%
(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)
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
Best Quarter:
Quarter ended September 30, 2002 5.16%
Worst Quarter:
Quarter ended June 30, 1999 (2.76)%
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%
(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.
---------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------
(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.
-----------------------------------------------------------------------------------------------------------------------
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%
-----------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------
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%
---------------------------------------------------------
(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
--------------------------------------------------------------------------------------------------------------------
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%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
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%
--------------------------------------------------------
(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.
--------------------------------------------------------------------------------------------------------------------
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%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
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%
--------------------------------------------------------
(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:
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
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
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
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
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
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
-------------------------------------------------------------------------
(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.
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%
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.
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
--------------------------------------------------------
(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:
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%
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.
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
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:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL:
-------------------------- --------------------------
First American Funds First American Funds
P.O. Box 3011 615 East Michigan Street
Milwaukee, WI 53201-3011 Milwaukee, WI 53202
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
- All purchases must be drawn on a bank located within the United States and
payable in U.S. dollars to First American Funds.
- Cash, money orders, cashier's checks 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.
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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:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL:
-------------------------- --------------------------
First American Funds First American Funds
P.O. Box 3011 615 East Michigan Street
Milwaukee, WI 53201-3011 Milwaukee, WI 53202
Your request should include the following information:
- name of the fund
- account number
- dollar amount or number of shares redeemed
- name on the account
- signatures of all registered account owners
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.
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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.
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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
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%
----------------------------------------------------------------------------------------------------------------------------
(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)
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%
---------------------------------------------------------------------------------------------------------------------------
(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 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%
-----------------------------------------------------------------------------------------------------------------------------
(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
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%
---------------------------------------------------------------------------------------------------------------------------------
(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 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%
-------------------------------------------------------------------------------------------------------------------------------
(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)
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%
---------------------------------------------------------------------------------------------------------------------------------
(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
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%
----------------------------------------------------------------------------------------------------------------------------------
(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 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%
-------------------------------------------------------------------------------------------------------------------------------
(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)
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%
--------------------------------------------------------------------------------------------------------------------------------
(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
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%
-----------------------------------------------------------------------------------------------------------------------------------
(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)
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%
------------------------------------------------------------------------------------------------------------------------------
(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 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%
-----------------------------------------------------------------------------------------------------------------------------------
(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
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%
-------------------------------------------------------------------------------------------------------------------------------
(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 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%
----------------------------------------------------------------------------------------------------------------------------------
(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)
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%
---------------------------------------------------------------------------------------------------------------------------------
(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
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%
----------------------------------------------------------------------------------------------------------------------------------
(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 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%
----------------------------------------------------------------------------------------------------------------------------------
(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)
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%
------------------------------------------------------------------------------------------------------------------------------
(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
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%
-----------------------------------------------------------------------------------------------------------------------------
(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)
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%
-----------------------------------------------------------------------------------------------------------------------------
(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 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%
-------------------------------------------------------------------------------------------------------------------------------
(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
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%
---------------------------------------------------------------------------------------------------------------------------------
(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 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%
-------------------------------------------------------------------------------------------------------------------------------
(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)
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%
-----------------------------------------------------------------------------------------------------------------------------------
(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
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
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)
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.
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)
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.
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)
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
Best Quarter:
Quarter ended September 30, 2002 4.30%
Worst Quarter:
Quarter ended June 30, 2004 (2.10)%
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07(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%
(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)
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
Best Quarter:
Quarter ended September 30, 2002 3.79%
Worst Quarter:
Quarter ended June 30, 2004 (1.77)%
AVERAGE ANNUAL TOTAL RETURNS Inception
AS OF 12/31/07 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%
(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)
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
Best Quarter:
Quarter ended September 30, 2002 4.14%
Worst Quarter:
Quarter ended June 30, 2004 (1.96)%
Since
AVERAGE ANNUAL TOTAL RETURNS Inception Inception
AS OF 12/31/07 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%
(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)
2.25% 1.00% 0.79% 2.93% 3.83%
2003 2004 2005 2006 2007
Best Quarter:
Quarter ended September 30, 2004 1.55%
Worst Quarter:
Quarter ended June 30, 2004 (1.37)%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/07 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%
(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.
--------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------
(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)
---------------------------------------------------------------------------------------------------------------------------
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)%
---------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------
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%
-----------------------------------------------------
(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
---------------------------------------------------------------------------------------------------------------------------
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)%
---------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------
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%
-----------------------------------------------------
(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:
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
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
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
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
----------------------------------------------------------------
(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.
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%
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:
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%
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.
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
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:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL:
-------------------------- --------------------------
First American Funds First American Funds
P.O. Box 3011 615 East Michigan Street
Milwaukee, WI 53201-3011 Milwaukee, WI 53202
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
- All purchases must be drawn on a bank located within the United States and
payable in U.S. dollars to First American Funds.
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:
REGULAR U.S. MAIL: OVERNIGHT EXPRESS MAIL:
-------------------------- --------------------------
First American Funds First American Funds
P.O. Box 3011 615 East Michigan Street
Milwaukee, WI 53201-3011 Milwaukee, WI 53202
Your request should include the following information:
- name of the fund
- account number
- dollar amount or number of shares redeemed
- name on the account
- signatures of all registered account owners
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.
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%
------------------------------------------------------
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
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%
-------------------------------------------------------------------------------------------------------------------------------
(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
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%
---------------------------------------------------------------------------------------------------------------------------------
(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
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%
------------------------------------------------------------------------------------------------------------------------------
(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 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%
-------------------------------------------------------------------------------------------------------------------------------
(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
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%
------------------------------------------------------------------------------------------------------------------------------
(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 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%
--------------------------------------------------------------------------------------------------------------------------
(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
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%
-----------------------------------------------------------------------------------------------------------------------------
(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 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%
------------------------------------------------------------------------------------------------------------------------------
(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
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%
----------------------------------------------------------------------------------------------------------------------------
(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 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%
------------------------------------------------------------------------------------------------------------------------------
(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
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%
----------------------------------------------------------------------------------------------------------------------------------
(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.
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%
---------------------------------------------------------------------------------------------------------------------------------
(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
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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.
12
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
26
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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