Rule 497(e)
FIRST AMERICAN STRATEGY FUNDS, INC.
STRATEGY INCOME FUND STRATEGY GROWTH AND INCOME FUND
STRATEGY GROWTH FUND STRATEGY AGGRESSIVE FUND
Supplement dated December 9, 1997
to
Prospectus dated October 1, 1996, as supplemented
January 31, 1997, March 26, 1997 and August 27, 1997
This supplement updates the aforementioned Prospectus to restate the
total fund operating expenses for each of the Funds at 0.25% and to remove
Regional Equity Fund as an Underlying Fund and add Small Cap Value Fund as an
Underlying Fund.
Under the heading "Fees and Expenses" on page 8 of the Prospectus, the
table entitled "Direct Annual Fund Operating Expenses" is amended and restated
in its entirety as follows:
DIRECT ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fee (after voluntary fee
waivers and reimbursements)(1) 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 fees None None None None
Other expenses (after voluntary fee waivers and
reimbursements)(1):
Shareholder servicing fee 0.25% 0.25% 0.25% 0.25%
Miscellaneous 0.00% 0.00% 0.00% 0.00%
Total other expenses 0.25% 0.25% 0.25% 0.25%
Total fund operating expenses (after voluntary
fee waivers and reimbursements)(1) 0.25% 0.25% 0.25% 0.25%
(1) The Adviser intends to waive a portion of its fees and/or reimburse
expenses on a voluntary basis, and the amounts shown reflect this
waiver and reimbursement as of the date of this Prospectus. The Adviser
intends to maintain such waiver and reimbursement in effect for the
current fiscal year but reserves the right to discontinue them at any
time in its sole discretion. Absent any waivers, investment advisory
fees as an annualized percentage of average daily net assets would be
0.25% for each of the Funds; other expenses calculated on such basis
would be 3.20% for Income Fund; 3.76% for Growth and Income Fund; 5.75%
for Growth Fund and 5.94% for Aggressive Growth Fund; and total fund
operating expenses calculated on such basis would be 3.45% for Income
Fund; 4.01% for Growth and Income Fund; 6.00% for Growth Fund and 6.19%
for Aggressive Growth Fund. "Other expenses" is based on estimated
amounts for the current fiscal year.
The table set forth under the heading "Fees and Expenses -- Ranges of
Combined Direct and Indirect Expense Ratios" on page 9 of the Prospectus is
amended and restated in its entirety as follows:
Ranges of combined direct and indirect Growth
expense ratios and Aggressive
Income Income Growth Growth
Fund Fund Fund Fund
0.91% 0.92% 0.99% 1.06%
to to to to
0.98% 1.19% 1.30% 1.36%
Example(2)
Using the midpoint of the ranges set forth above, you would pay the following
expenses on a $1,000 investment, assuming (i) a 5% annual return, and (ii)
redemption at the end of each time period:
Growth
and Aggressive
Income Income Growth Growth
Fund Fund Fund Fund
1 year $10 $11 $12 $12
3 years $30 $34 $37 $38
(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1 and 3-year periods would be as follows: Income
Fund, $42 and $126; Growth and Income Fund, $48 and $145; Growth Fund,
$68 and $201; and Aggressive Growth Fund, $71 and $208.
Under the heading "Fees and Expenses -- Underlying Fund Expense Ratios"
on page 9 of the Prospectus, the table stating each Underlying Fund's expense
ratio is amended to delete the references to Regional Equity Fund and to add the
Small Cap Value Fund as an Underlying Fund with an expense ratio of 0.90%.
Under the heading "Investment Objectives and Policies -- Investment
Policies" on page 13 of the Prospectus, the table stating the allocation and
re-allocation of the Fund's net assets among the Underlying Funds is amended to
delete the reference to Regional Equity Fund and to replace such reference with
Small Cap Value Fund at the same allocation and re-allocation percentages set
forth opposite Regional Equity Fund's name.
The section titled "The Underlying Funds -- Regional Equity Fund" on
page 21 of the Prospectus is deleted and replaced to read as follows:
SMALL CAP VALUE FUND
OBJECTIVE
Small Cap Value Fund has an objective of capital appreciation.
INVESTMENT POLICIES
Under normal market conditions, Small Cap Value Fund invests at least
65% of its total assets in equity securities of small-capitalization
companies. For these purposes, small-capitalization companies are
deemed those with market capitalizations of less than $1 billion at the
time of purchase. In selecting equity securities, Small Cap Value
Fund's adviser utilizes a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other
securities at the time of purchase. In assessing relative value, Small
Cap Value Fund's adviser will consider such factors as ratios of market
price to book value, market price to earnings, and market price to
assets, estimated earnings growth rate, cash flow and liquidation
value.
Small Cap Value Fund also may invest up to 35% of its total assets in
the aggregate in equity securities of issuers with a market
capitalization of $1 billion or more and in fixed income securities of
the kinds described under "Special Investment Methods -- Fixed Income
Securities."
Under the headings "The Underlying Funds -- Policies Common to
Underlying Equity Funds and -- Risks to Consider with Respect to the Underlying
Funds" on pages 28 and 31 of the Prospectus, respectively, all references to
Regional Equity Fund are deleted and replaced with references to Small Cap Value
Fund.
In the first paragraph under the heading "Special Investment Methods --
Foreign Securities" on page 54 of the Prospectus, the second sentence is deleted
and replaced to read as follows:
In addition, the other Equity Funds may invest lesser proportions of
their assets in securities of foreign issuers which are either listed
on a United States securities exchange or represented by American
Depositary Receipts.
<PAGE>
FIRST AMERICAN STRATEGY FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 1, 1996 AS SUPPLEMENTED JANUARY 31, 1997,
MARCH 26, 1997, AUGUST 27, 1997, SEPTEMBER 30, 1997 AND DECEMBER 9, 1997
INCOME FUND GROWTH FUND
GROWTH AND INCOME FUND AGGRESSIVE GROWTH FUND
This Statement of Additional Information relates to the funds named
above (the "Funds"), each of which is a series of First American Strategy Funds,
Inc. ("FASF"). This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Funds' current Prospectus dated October
1, 1996 as supplemented January 31, 1997, March 26, 1997, August 27, 1997 and
December 9, 1997. This Statement of Additional Information is incorporated into
the Funds' Prospectus by reference. To obtain copies of the Prospectus, write or
call the Funds' distributor SEI Investments Distribution Co., Oaks, Pennsylvania
19456, telephone: 1-888-99STRAT. Please retain this Statement of Additional
Information for future reference.
TABLE OF CONTENTS
PAGE
----
General Information........................... 2
Investment Restrictions of the Funds.......... 3
Additional Information Concerning
Investments by the Funds and the
Underlying Funds.............................. 5
Short-Term Investments..................... 5
Repurchase Agreements...................... 5
When-Issued and Delayed-Delivery
Transactions............................ 6
Lending of Portfolio Securities............ 6
Options Transactions....................... 6
Futures and Options on Futures............. 7
Foreign Securities......................... 8
Foreign Currency Transactions.............. 8
Mortgage-Backed Securities................. 9
Debt Obligations Rated Less Than
Investment Grade........................ 11
Investment Restrictions of the Underlying
Funds......................................... 12
Restrictions Applicable to the Equity
Funds and Fixed Income Fund............. 12
Restrictions Applicable to Prime Obligations
Fund.................................... 14
Directors and Executive Officers.............. 16
Directors.................................. 16
Executive Officers......................... 16
Compensation............................... 18
Investment Advisory and Other Services
for the Funds................................. 18
Investment Advisory Agreement.............. 18
Administration Agreement................... 19
Distributor and Shareholder Service
Plan and Agreement...................... 19
Custodian; Transfer Agent; Counsel;
Accountants............................. 19
Investment Advisory Services for the
Underlying Funds.............................. 20
Investment Advisory Agreements of
the Underlying Funds.................... 20
Sub-Advisory Agreement for International
Fund.................................... 21
Portfolio Managers for the Underlying
Funds................................... 21
Portfolio Transactions and Allocation
of Brokerage................................. 23
Capital Stock................................. 26
Net Asset Value and Public Offering
Price........................................ 27
Fund Performance.............................. 27
SEC Standardized Performance Figures....... 27
Non-Standard Distribution Rates............ 28
Certain Performance Comparisons............ 28
Taxation...................................... 29
Ratings....................................... 30
Ratings of Corporate Obligations and
Municipal Bonds.......................... 30
Ratings of Preferred Stock................. 32
Ratings of Commercial Paper................ 33
Best's Rating System for Insurance
Companies................................ 33
Financial Statements.......................... 34
<PAGE>
GENERAL INFORMATION
First American Strategy Funds, Inc. ("FASF") was incorporated in the
State of Minnesota on June 19, 1996. FASF is organized as a series fund and
currently issues its shares in four series. Each series of shares represents a
separate investment portfolio with its own investment objectives and policies
(in essence, a separate mutual fund). The series of FASF to which this Statement
of Additional Information relates are named on the cover hereof. These series
are referred to in this Statement of Additional Information as the "Funds."
As described in the Funds' Prospectus, each Fund seeks to achieve its
investment objectives by investing primarily in a variety of other mutual funds
which are also advised by the Funds' investment adviser. These other mutual
funds include Equity Income Fund, Stock Fund, Diversified Growth Fund, Emerging
Growth Fund, Small Cap Value Fund, Special Equity Fund, International Fund,
Technology Fund, Health Sciences Fund, Real Estate Securities Fund and Fixed
Income Fund, each of which is a series of First American Investment Funds, Inc.
("FAIF"), and Prime Obligations Fund, which is a series of First American Funds,
Inc. ("FAF"). These other funds are referred to herein and in the Prospectus
collectively as the "Underlying Funds." The first ten funds named above are
referred to herein and in the Prospectus collectively as the "Equity Funds."
The Bylaws of FASF provide that annual shareholders meetings are not
required and that meetings of shareholders need only be held with such frequency
as required under Minnesota law and the Investment Company Act of 1940 (the
"1940 Act"). Minnesota law provides that if a regular meeting of shareholders
has not been held during the immediately preceding 15 months, a shareholder or
shareholders holding 3% or more of the voting power of all shares entitled to
vote may demand a regular meeting of shareholders. Minnesota law further
provides that a special meeting of shareholders may be called by a shareholder
or shareholders holding 10% or more of the voting power of all shares entitled
to vote, except that a special meeting for the purpose of considering any action
to facilitate or effect a business combination, including any action to change
or otherwise affect the composition of the board of directors for that purpose,
must be called by 25% or more of the voting power of all shares entitled to
vote. The 1940 Act requires a shareholder vote for all amendments to fundamental
investment policies and restrictions, for approval of all investment advisory
agreements, and for the adoption of, and material increases in amounts payable
under, Rule 12b-1 distribution plans.
<PAGE>
INVESTMENT RESTRICTIONS OF THE FUNDS
In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" below, each of the Funds is subject to
the investment restrictions set forth below. The investment restrictions set
forth in paragraphs 1 through 10 below are fundamental and cannot be changed
with respect to a Fund without approval by the holders of a majority of the
outstanding shares of that Fund as defined in the 1940 Act, i.e., by the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy, or (b)
more than 50% of the outstanding shares of the Fund.
None of the investment restrictions set forth below shall be deemed to
restrict any Fund from holding securities of investment companies which engage
in the activities described in such investment restrictions. None of the
investment restrictions set forth below shall be deemed to restrict any Fund
from receiving, holding, and disposing of any securities received as a result of
an in-kind redemption by an investment company whose shares are held by such
Fund.
None of the Funds will:
1. Invest more than 25% of its total assets in any one industry, except
for investment companies which are part of the "same group of
investment companies" (as defined in Rule 11a-3 under the 1940 Act) as
the Funds.
2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options may be deemed to constitute issuing a senior
security.
3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of the Funds will borrow money for leverage
purposes. For the purpose of this investment restriction, the use of
options and futures transactions shall not be deemed the borrowing of
money. (As a non-fundamental policy, no Fund will make additional
investments while its borrowings exceed 5% of total assets.)
4. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 15% of the value of its total assets to secure temporary or
emergency borrowing.
5. Make short sales of securities.
6. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.
7. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict any Fund from purchasing or
selling any financial contracts or instruments which may be deemed
commodities (including, by way of example and not by way of
limitation, options, futures and options on futures with respect, in
each case, to interest rates, currencies, stock indices, bond indices
or interest rate indices) or any security which is collateralized or
otherwise backed by physical commodities.
8. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or
interests therein or issued by companies that invest in or hold real
estate or interests therein, and in mortgage-backed securities.
<PAGE>
9. Act as an underwriter of securities of other issuers, except to the
extent a Fund may be deemed to be an underwriter, under Federal
securities laws, in connection with the disposition of portfolio
securities.
10. Lend any of their assets, except portfolio securities representing up
to one-third of the value of their total assets.
The following restrictions are non-fundamental and may be changed by
FASF's Board of Directors without shareholder vote. None of the Funds will:
11. Invest more than 15% of its net assets in all forms of illiquid
investments, as determined pursuant to applicable Securities and
Exchange Commission rules and interpretations.
12. Invest in any securities, if as a result more than 5% of the value of
its total assets is invested in the securities of any issuers, other
than registered investment companies and series thereof, which, with
their predecessors, have a record of less than three years continuous
operation. (Securities of any of such issuers will not be deemed to
fall within this limitation if they are guaranteed by an entity which
has been in continuous operation for more than three years.)
13. Invest for the purpose of exercising control or management.
14. Purchase or sell real estate limited partnership interests, or oil,
gas or other mineral leases, rights or royalty contracts, except that
the Funds may purchase or sell securities of companies which invest in
or hold the foregoing.
15. Purchase securities of any other registered investment company (as
defined in the 1940 Act), except, subject to 1940 Act limitations, (a)
each of the Funds may, as part of its investment in cash items, invest
in securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less, (b) all
Funds may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets, and (c) all Funds may invest
in securities of other registered investment companies to the extent
permitted by applicable Securities and Exchange Commission exemptive
relief, no-action letters, or rules or pursuant to the 1940 Act.
<PAGE>
ADDITIONAL INFORMATION CONCERNING INVESTMENTS
BY THE FUNDS AND THE UNDERLYING FUNDS
The investment objectives, policies and restrictions of the Funds and
the Underlying Funds are set forth in the Funds' Prospectus. Additional
information concerning the investments which may be made by the Funds and the
Underlying Funds is set forth under this caption. Additional information
concerning the Funds' investment restrictions is set forth above under the
caption "Investment Restrictions of the Funds," and additional information
concerning the Underlying Funds' investment restrictions is set forth below
under the caption "Investment Restrictions of the Underlying Funds."
SHORT-TERM INVESTMENTS
The Funds and the Underlying Funds can invest in a variety of
short-term instruments which are specified in the Prospectus. Short-term
investments may be entered into on a joint basis by the Funds, the Underlying
Funds, and other funds advised by the Adviser, and repurchase agreements may be
entered into on a joint basis by the Underlying Funds and other funds advised by
the Adviser, in each case to the extent permitted by Securities and Exchanges
Commission exemptive order. 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 Prospectus, the Funds and the Underlying Funds may
purchase commercial paper consisting of issues rated at the time of purchase
within the two highest rating categories by Standard & Poor's Corporation
("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's"), or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization. The Funds and the Underlying Funds also may
invest in commercial paper that is not rated but that is determined by the
Adviser to be of comparable quality to instruments that are so rated. For a
description of the rating categories of Standard & Poor's and Moody's, see
"Ratings" herein.
BANKERS ACCEPTANCES. Bankers acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund or an Underlying Fund and the issuer, they are not normally
traded. Although there is no secondary market in the notes, a Fund or an
Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. The Adviser or, in the case of
International Fund, its sub-adviser will consider the earning power, cash flow,
and other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand.
REPURCHASE AGREEMENTS
The Underlying Funds may invest in repurchase agreements to the extent
specified in the Prospectus. The Underlying 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 Underlying Fund will promptly receive additional
collateral (so the total collateral is an amount at least equal to the
repurchase price plus accrued interest).
<PAGE>
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
When an Underlying Fund agrees to purchase securities on a when-issued
or delayed-delivery basis, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside securities to satisfy the purchase
commitment, and in that case, an Underlying Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Underlying Fund's
commitments. It may be expected that an Underlying 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 an
Underlying Fund will set aside cash or liquid securities to satisfy its purchase
commitments in the manner described above, its liquidity and the ability of its
adviser to manage it might be affected in the event its commitments to purchase
when-issued or delayed-delivery securities ever exceeded 25% of the value of its
assets. Under normal market conditions, however, an Underlying Fund's
commitments to purchase when-issued or delayed-delivery securities will not
exceed 25% of the value of its assets.
LENDING OF PORTFOLIO SECURITIES
When an Underlying Fund lends portfolio securities, it must receive
100% collateral as described in the Prospectus. This collateral must be valued
daily by the Underlying Fund's adviser or sub-adviser and, if the market value
of the loaned securities increases, the borrower must furnish additional
collateral to the lending Underlying Fund. During the time portfolio securities
are on loan, the borrower pays the lending Underlying Fund any dividends or
interest paid on the securities. Loans are subject to termination by the lending
Underlying Fund or the borrower at any time. While an Underlying 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.
As set forth in the Prospectus, First Trust National Association, the
Funds' and the Underlying Funds' custodian and an affiliate of the Adviser, may
act as securities lending agent for the Underlying Funds and receive separate
compensation for such services.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. To the extent specified in the Prospectus,
Underlying Funds may purchase put and call options on securities and may write
covered call options on securities which they own or have the right to acquire.
An Underlying Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, an Underlying 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, an Underlying Fund may purchase call options to hedge
against an increase in the price of securities that the Underlying 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
Underlying Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire unexercised.
The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If an
Underlying Fund was unable to effect a closing purchase transaction in a
secondary market, it would not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the
<PAGE>
closing value of the stock index upon which the option is based is greater than,
in the case of a call, or lesser than, in the case of a put, the exercise price
of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing value of the interest rate index upon which the option is
based is greater than, in the case of a call, or lesser than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
writer of the option is obligated, for the premium received, to make delivery of
this amount. Unlike interest rate futures options contracts, settlements for
interest rate index options are always in cash. Gain or loss depends on price
movements in the interest rate movements with respect to specific financial
instruments. As with stock index options, the multiplier for interest rate index
options determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current value of the
underlying interest rate index. Options on different interest rate indices may
have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Funds and certain of the Underlying
Funds may enter into futures contracts and may purchase options on futures
contracts of various types. In the case of the Funds, these investment
techniques may be used in order to remain effectively fully invested in
proportions consistent with their current asset allocation strategy in a cost
effective manner; to re-allocate assets among asset categories while minimizing
transaction costs; to maintain cash reserves while simulating full investment;
to facilitate trading; or to seek higher investment returns when a futures
contract is priced more attractively than the underlying security or index. In
the case of the Underlying Funds, these investment techniques are designed
primarily to hedge against anticipated future changes in market conditions or
foreign exchange rates which otherwise might adversely affect the value of
securities which an Underlying Fund holds or intends to purchase. The types of
futures and options on futures which the Funds and particular Underlying Funds
may utilize are described in the Prospectus.
At the same time a futures contract is purchased or sold, a Fund or
Underlying Fund generally must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit would be
approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be
required, since each day the Fund or Underlying Fund would provide or receive
cash that reflects any decline or increase in the contract's value. Futures
transactions also involve brokerage costs and require a Fund or Underlying Fund
to segregate liquid assets, such as cash, United States Government securities or
other liquid high grade debt obligations, to cover its performance under such
contracts.
A Fund or Underlying Fund may lose the expected benefit of futures
transactions if interest rates, securities prices or foreign exchange rates move
in an unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund or Underlying Fund had not entered into any
futures transactions. In addition, the value of an Underlying Fund's futures
positions may not prove to be perfectly or even highly correlated with the value
of its portfolio securities and foreign currencies, limiting the Fund's or
Underlying Fund's ability to hedge effectively against interest rate, foreign
exchange rate and/or market risk and giving rise to additional risks. Because of
the low margin requirements in the futures markets, they may be subject to
market forces, including speculative
<PAGE>
activity, which do not affect the cash markets. There also is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
FOREIGN SECURITIES
As described in the Prospectus, under normal market conditions
International Fund invests principally in foreign securities. In addition, the
other Equity Funds may invest lesser proportions of their assets in securities
of foreign issuers which are either listed on a United States securities
exchange or represented by American Depositary Receipts, and Fixed Income Fund
and Prime Obligations Fund may invest in securities of foreign issuers in the
manner and to the extent described in the Prospectus.
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on United States exchanges. Foreign markets also
have different clearance and settlement procedures, and in some markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of International Fund is uninvested. In addition, settlement problems
could cause International Fund to miss attractive investment opportunities or to
incur losses due to an inability to sell or deliver securities in a timely
fashion. In the event of a default by an issuer of foreign securities, it may be
more difficult for a Fund to obtain or to enforce a judgment against the issuer.
FOREIGN CURRENCY TRANSACTIONS
As described in the Prospectus, International Fund may engage in a
variety of foreign currency transactions in connection with its investment
activities. These include forward foreign currency exchange contracts, foreign
currency futures, and foreign currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. International Fund will not enter into
such forward contracts or maintain a net exposure in such contracts where
International Fund 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. International Fund will comply with applicable Securities and Exchange
Commission announcements requiring it to segregate assets to cover its
commitments with respect to such contracts. At the present time, these
announcements generally require a fund with a long position in a forward foreign
currency contract to establish with its custodian a segregated account
containing cash or liquid high grade debt securities equal to the purchase price
of the contract, and require a fund with a short position in a forward foreign
currency contract to establish with its custodian a segregated account
containing cash or liquid high grade debt securities that, when added to any
margin deposit, equal the market value of the currency underlying the forward
contract. These requirements will not apply where a forward contract is used in
connection with the settlement of investment purchases or sales or where the
position has been "covered" by entering into an offsetting position.
International Fund generally will not enter into a forward contract with a term
longer than one year.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of its financial futures
transactions, International Fund may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, International Fund may be able to achieve many of the same objectives
as through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
<PAGE>
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 International Fund against an adverse movement in the value
of a foreign currency, it would not limit the gain which might result from a
favorable movement in the value of the currency. For example, if International
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 International Fund's gain would be offset in part by the premium
paid for the option. Similarly, if International 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, International Fund would not need to
exercise its call if the currency instead depreciated in value. In such a case,
International Fund could acquire the amount of foreign currency needed for
settlement in the spot market at a lower price than the exercise price of the
option.
MORTGAGE-BACKED SECURITIES
As described in the Prospectus, Fixed Income Fund may invest in
mortgage-backed securities. Fixed Income Fund will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates or
collateralized mortgage obligations ("CMOs"), as defined and described in the
Prospectus.
Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Thus, each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of
<PAGE>
the property securing the loans. Because residential mortgage loans generally
provide for monthly amortization and may be prepaid in full at any time, the
weighted average maturity of a pool of residential mortgage loans is likely to
be substantially shorter than its stated final maturity date. The rate at which
a pool of residential mortgage loans is prepaid may be influenced by many
factors and is not predictable with precision.
As stated in the Prospectus, CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions of
the principal payments and prepayments and/or of the interest payments on the
underlying mortgage loans. These entitlements can be specified in a wide variety
of ways, so that the payment characteristics of various classes may differ
greatly from one another. For example:
* In a sequential-pay CMO structure, one class is entitled to receive
all principal payments and prepayments on the underlying mortgage
loans (and interest on unpaid principal) until the principal of the
class is repaid in full, while the remaining classes receive only
interest; when the first class is repaid in full, a second class
becomes entitled to receive all principal payments and prepayments on
the underlying mortgage loans until the class is repaid in full, and
so forth.
* A planned amortization class ("PAC") of CMOs is entitled to receive
principal on a stated schedule to the extent that it is available from
the underlying mortgage loans, thus providing a greater (but not
absolute) degree of certainty as to the schedule upon which principal
will be repaid.
* An accrual class of CMOs provides for interest to accrue and be added
to principal (but not be paid currently) until specified payments have
been made on prior classes, at which time the principal of the accrual
class (including the accrued interest which was added to principal)
and interest thereon begins to be paid from payments on the underlying
mortgage loans.
* As discussed above with respect to Agency Pass-Through Certificates,
an interest-only class of CMOs entitles the holder to receive all of
the interest and none of the principal on the underlying mortgage
loans, while a principal-only class of CMOs entitles the holder to
receive all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive interest
at a rate which changes in the same direction and magnitude as changes
in a specified index rate. An inverse floating rate class of CMOs
entitles the holder to receive interest at a rate which changes in the
opposite direction from, and in the same magnitude as or in a multiple
of, changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and "floors" on
adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of payment to
one or more other classes. Such a subordinated class provides some or
all of the credit support for the classes that are senior to it by
absorbing losses on the underlying mortgage loans before the senior
classes absorb any losses. A subordinated class which is subordinated
to one or more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated class
generally carries a lower rating than the classes that are senior to
it, but may still carry an investment grade rating.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
As described in the Prospectus, the "equity securities" in which
certain Underlying Funds may invest include corporate debt obligations which are
convertible into common stock. These convertible debt obligations may include
obligations rated as low as CCC by Standard & Poor's or Caa by Moody's or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Debt obligations rated BB, B or CCC by Standard
& Poor's or Ba, B or Caa by Moody's are
<PAGE>
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." The limitations on investments by the Underlying Funds in less
than investment grade convertible debt obligations are set forth in the
Prospectus.
Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default.
Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.
In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for Equity Income Fund to
value and dispose of such obligations. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of less than investment grade obligations, especially in a
thin secondary trading market.
Certain risks also are associated with the use of credit ratings as a
method for evaluating less than investment grade debt obligations. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of such obligations. In addition, credit rating agencies may
not timely change credit ratings to reflect current events. Thus, the success of
Equity Income Fund's use of less than investment grade convertible debt
obligations may be more dependent on its adviser's own credit analysis than is
the case with investment grade obligations.
<PAGE>
INVESTMENT RESTRICTIONS OF THE UNDERLYING FUNDS
RESTRICTIONS APPLICABLE TO THE EQUITY FUNDS AND FIXED INCOME FUND
In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" above, the Equity Funds and Fixed Income
Fund are subject to the investment restrictions set forth below. The investment
restrictions set forth in paragraphs 1 through 10 below are fundamental and
cannot be changed with respect to any of these Underlying Funds without approval
by the holders of a majority of the outstanding shares of the applicable
Underlying Fund as defined in the 1940 Act. See "Investment Restrictions of the
Funds" above.
None of the Equity Funds or Fixed Income Fund will:
1. Except for Technology Fund and Health Sciences Fund, invest in any
securities if, as a result, 25% or more of the value of its total
assets would be invested in the securities of issuers conducting their
principal business activities in any one industry, except that Real
Estate Securities Fund will invest without restriction in issuers
principally engaged in the real estate industry. This restriction does
not apply to securities of the United States Government or its
agencies and instrumentalities or repurchase agreements relating
thereto.
2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options or purchasing securities on a when-issued basis
may be deemed to constitute issuing a senior security.
3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of these Underlying Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed-delivery basis shall not be
deemed the borrowing of money. (As a non-fundamental policy, no such
Underlying Fund will make additional investments while its borrowings
exceed 5% of total assets.)
4. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 15% of the value of its total assets to secure temporary or
emergency borrowing.
5. Make short sales of securities.
6. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except, in the case of Emerging Growth Fund, Technology Fund, and
International Fund, as may be necessary to make margin payments in
connection with foreign currency futures and other derivative
transactions.
7. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict any of these Underlying Funds from
purchasing or selling any financial contracts or instruments which may
be deemed commodities (including, by way of example and not by way of
limitation, options, futures and options on futures with respect, in
each case, to interest rates, currencies, stock indices, bond indices
or interest rate indices) or any security which is collateralized or
otherwise backed by physical commodities.
8. Purchase or sell real estate or real estate mortgage loans, except
that these Underlying Funds may invest in securities secured by real
estate or interests therein or issued by companies that invest in or
hold real estate or interests therein, and except that Fixed Income
Fund, Emerging
<PAGE>
Growth Fund, Small Cap Value Fund, Technology Fund, Health Sciences
Fund, Real Estate Securities Fund, and International Fund may invest in
mortgage-backed securities.
9. Act as an underwriter of securities of other issuers, except to the
extent such an Underlying Fund may be deemed to be an underwriter,
under Federal securities laws, in connection with the disposition of
portfolio securities.
10. Lend any of their assets, except portfolio securities representing up
to one-third of the value of their total assets.
The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without shareholder vote. None of the Equity Funds or
Fixed Income Fund will:
11. Invest more than 15% of its net assets in all forms of illiquid
investments, as determined pursuant to applicable Securities and
Exchange Commission rules and interpretations.
12. Invest in any securities, if as a result more than 5% of the value of
its total assets is invested in the securities of any issuers (other
than, in the case of Real Estate Securities Fund, publicly traded real
estate investment trusts) which, with their predecessors, have a
record of less than three years continuous operation. (Securities of
any of such issuers will not be deemed to fall within this limitation
if they are guaranteed by an entity which has been in continuous
operation for more than three years.)
13. Invest for the purpose of exercising control or management.
14. Purchase or sell real estate limited partnership interests (other
than, in the case of Real Estate Securities Fund, publicly traded real
estate limited partnership interests), or oil, gas or other mineral
leases, rights or royalty contracts, except that these Underlying
Funds may purchase or sell securities of companies which invest in or
hold the foregoing.
15. Purchase securities of any other registered investment company (as
defined in the 1940 Act), except, subject to 1940 Act limitations, (a)
International Fund may purchase shares of open-end investment
companies which invest in permitted investments for such Underlying
Fund; (b) each of Stock Fund, Equity Income Fund, Diversified Growth
Fund, Emerging Growth Fund, Small Cap Value Fund, Special Equity Fund,
Technology Fund, Health Sciences Fund, Real Estate Securities Fund,
International Fund, and Fixed Income Fund may, as part of its
investment in cash items, invest in securities of other mutual funds
which invest primarily in debt obligations with remaining maturities
of 13 months or less; and (c) all such Underlying Funds may purchase
securities as part of a merger, consolidation, reorganization or
acquisition of assets.
16. Invest in foreign securities, except that (a) Fixed Income Fund each
may invest up to 15% of its total assets in foreign securities payable
in United States Dollars; (b) Stock Fund, Equity Income Fund,
Diversified Growth Fund, Emerging Growth Fund, Special Equity Fund,
Small Cap Value Fund, Technology Fund, Health Sciences Fund, and Real
Estate Securities Fund each may invest may invest up to 25% of its
total assets in securities of foreign issuers which are either listed
on a United States stock exchange or represented by American
Depositary Receipts; and (c) International Fund may invest in foreign
securities without limitation.
17. Except for International Fund, invest in warrants; provided, that the
other of such Underlying Funds may invest in warrants in an amount not
exceeding 5% of such Underlying Fund's net assets. No more than 2% of
this 5% may be warrants which are not listed on the New York Stock
Exchange.
<PAGE>
For determining compliance with its investment restriction relating to
industry concentration, each such Underlying Fund classifies asset-backed
securities in its portfolio in separate industries based upon a combination of
the industry of the issuer or sponsor and the type of collateral. The industry
of the issuer or sponsor and the type of collateral will be determined by the
Underlying Fund's adviser. For example, an asset-backed security known as "Money
Store 94D A2" would be classified as follows: the issuer or sponsor of the
security is The Money Store, a personal finance company, and the collateral
underlying the security is automobile receivables. Therefore, the industry
classification would be Personal Finance Companies -- Automobile. Similarly, an
asset-backed security known as "Midlantic Automobile Grantor Trust 1992-1 B"
would be classified as follows: the issuer or sponsor of the security is
Midlantic National Bank, a banking organization, and the collateral underlying
the security is automobile receivables. Therefore, the industry classification
would be Banks -- Automobile. Thus, an issuer or sponsor may be included in more
than one "industry" classification, as may a particular type of collateral.
RESTRICTIONS APPLICABLE TO PRIME OBLIGATIONS FUND
In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" above, Prime Obligations Fund is subject
to the investment restrictions set forth below. The investment restrictions set
forth in paragraphs 1 through 12 below are fundamental and cannot be changed
without approval by the holders of a majority of the outstanding shares of Prime
Obligations Fund as defined in the 1940 Act. See "Investment Restrictions of the
Funds" above.
Prime Obligations Fund may not:
1. Purchase common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal
bonds, or industrial revenue bonds (except through the purchase of
obligations referred to under "Investment Objective and Policies" in
Prime Obligations Fund's Prospectus).
2. Borrow money except from banks for temporary or emergency purposes for
the purpose of meeting redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of Prime Obligations Fund's
total assets (including the amount borrowed) valued at the lesser of
cost or market less liabilities (not including the amount borrowed) at
the time the borrowing is made. The borrowings will be repaid before
any additional investments are made. However, even with such authority
to borrow money, there is no assurance that Prime Obligations Fund
will not have to dispose of securities on an untimely basis to meet
redemption requests.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets but only to
secure borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Write or purchase put or call options, except that Prime Obligations
Fund may write or purchase put or call options in connection with the
purchase of variable rate certificates of deposit described below.
6. Underwrite the securities of other issuers except to the extent Prime
Obligations Fund may be deemed to be an underwriter, under federal
securities laws, in connection with the disposition of portfolio
securities, or purchase securities with contractual or other
restrictions on resale.
7. Invest more than 10% of its net assets in illiquid assets, including,
without limitation, time deposits and repurchase agreements maturing
in more than seven days.
<PAGE>
8. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests.
9. Lend money to others except through the purchase of debt obligations
of the type which Prime Obligations Fund is permitted to purchase (see
"Investment Objective and Policies" in Prime Obligations Fund's
Prospectus).
10. Invest 25% or more of its assets in the securities of issuers in any
single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the United States, its
agencies or instrumentalities, or obligations of domestic commercial
banks, excluding for this purpose, foreign branches of domestic
commercial banks. As to utility companies, gas, electric, water, and
telephone companies are considered as separate industries. As to
finance companies, the following two categories are each considered a
separate industry: (A) business credit institutions, such as Honeywell
Finance Corporation and General Electric Credit Corp., and (B)
personal credit institutions, such as Sears Roebuck Acceptance Corp.
and Household Finance Corporation.
11. Invest in companies for the purpose of exercising control.
12. Purchase or retain the securities of any issuer if any of the officers
or directors of Prime Obligations Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
In connection with Prime Obligations Fund's purchase of variable rate
certificates of deposit ("CDs"), it may enter into agreements with banks or
dealers allowing Prime Obligations Fund to resell the certificates to the bank
or dealer, at Prime Obligations Fund's option. Time deposits which may be
purchased by Prime Obligations Fund are deposits held in foreign branches of
United States banks which have a specified term or maturity. Prime Obligations
Fund purchases CDs from only those domestic savings and loan institutions which
are regulated by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation ("FDIC"), and whose deposits are insured by either the
Savings Association Insurance Fund or the Bank Insurance Fund, each of which is
administered by the FDIC. However, because Prime Obligations Fund purchases
large denomination CDs, it does not expect to benefit materially from such
insurance. The policies described in this paragraph are nonfundamental and may
be changed by FAF's Board of Directors.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FASF are listed below, together
with their business addresses and their principal occupations during the past
five years. Directors who are "interested persons" (as that term is defined in
the 1940 Act) of FASF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FASF since June 1996, of FAIF since September 1994 and of FAF since
December 1994; Chairman (1989-1993) and Chief Executive Officer (1993-present),
Okabena Company (private family investment office). Age: 54.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and services management company, since
1975. Age: 49.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FASF since June 1996, of FAIF and FAF since November 1993; President
and owner of Executive and Management Consulting, Inc., a management consulting
firm; Vice President, Chief Financial Officer, Treasurer, Secretary and Director
of Anderson Corporation, a large privately-held manufacturer of wood windows,
from 1983 to October 1992. Age: 55.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center, Minnesota
55429: Director of FAIF, FAF and FASF since January 31, 1997; employed by First
Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most recently
as Vice President, First Bank National Association. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FASF since June 1996, of FAF since 1984 and of FAIF
since April 1991; Chairman of FAF's and FAIF's Boards since 1993 and of FASF's
Board since June 1996; President of FAF and FAIF from June 1989 to November
1989; Owner and President, Strauss Management Company, since 1993; Owner and
President, Community Resource Partnerships, Inc., a community business retention
survey company, since 1992; attorney-at-law. Age: 56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FASF since June 1996, of FAIF since August 1987 and of FAF since
April 1991; Owner and President, Strategic Management Resources, Inc. since
1993; formerly President and Director of The Inventure Group, a management
consulting and training company, President of Scott's, Inc., a transportation
company, and Vice President of Human Resources of The Pillsbury Company. Age:
52.
Gae B. Veit, P.O. Box 6, Loretto, Minnesota 55357: Director of FASF
since June 1996, of FAIF and FAF since 1993; owner and CEO of Shingobee
Builders, Inc., a general contractor. Age: 53.
EXECUTIVE OFFICERS
David Lee, SEI Investments Company, Oaks, Pennsylvania 19456: President
of FASF since June 1996 and of FAIF and FAF since April 1994; Senior Vice
President and Assistant Secretary of FAF and FAIF beginning June 1, 1993; Senior
Vice President of SEI Investments Distribution Co. (the "Distributor") since
1991; President, GW Sierra Trust Funds prior to 1991. Age: 44.
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FASF since June 1996 and of FAIF and FAF
beginning November 1992; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Corporation ("SEI"), SEI Investments Management
Corporation (the "Administrator") and the Distributor since 1981. Age: 52.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since April 1994; Senior Vice President, Assistant Secretary and General
Counsel of the Administrator and the Distributor. Age: 36.
<PAGE>
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since April 1994; Vice President and Assistant Secretary of the
Administrator and the Distributor since April 1994; Associate, Morgan, Lewis &
Bockius, from 1989 to 1994. Age: 37.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since 1992; Vice President and Assistant Secretary of the Administrator and
the Distributor since 1983. Age: 40.
Marc Cahn, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FASF, FAIF and FAF since June 1996; Vice
President and Assistant Secretary of the Administrator and Distributor since May
1996; Associate General Counsel, Barclays Bank PLC, from 1994 to 1996; ERISA
Counsel, First Fidelity Bancorporation, prior to 1994. Age: 39.
Barbara A. Nugent, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF, FAIF and FAF since June 1996;
Vice President and Assistant Secretary of the Administrator and Distributor
since April 1996; Associate, Drinker, Biddle & Reath, from 1994 to 1996;
Assistant Vice President/Administration (1992 to 1993) and Operations (1988 to
1992), Delaware Service Company, Inc. Age: 39.
Stephen G. Meyer, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller of FASF since June 1996 and of FAIF and FAF since March 1995;
Director of Internal Audit and Risk Management of SEI from 1992 to 1995; Senior
Associate, Coopers & Lybrand, from 1990 to 1992. Age: 31.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FASF since June 1996 and of FAIF since April 1991 and of FAF
since 1981; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FASF, FAIF and FAF. Age: 52.
COMPENSATION
The First American Family of Funds, which includes FASF, FAIF and FAF,
currently pays only to directors of the funds who are not paid employees or
affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or a committee chair). In addition, directors may receive a
per diem fee of $1,000 per day plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out of town Board or
committee meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FASF, FAIF and FAF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FASF (i) by FASF (column 2), and (ii) by
FASF, FAIF and FAF collectively (column 5) during the fiscal year ended
September 30, 1996. No executive officer or affiliated person of FASF had
aggregate compensation from FASF in excess of $60,000 during such fiscal year:
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
<S> <C> <C> <C> <C>
Robert J. Dayton, Director -0- -0- -0- $32,850
Andrew M. Hunter III, Director * -0- -0- -0- -0-
Leonard W. Kedrowski, Director -0- -0- -0- $34,150
Robert L. Spies, Director * -0- -0- -0- -0-
Joseph D. Strauss, Director -0- -0- -0- $56,375
Virginia L. Stringer, Director -0- -0- -0- $35,350
Gae B. Veit, Director -0- -0- -0- $34,950
</TABLE>
* Not a director during the fiscal year ended September 30, 1996.
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS
INVESTMENT ADVISORY AGREEMENT
First Bank National Association (the "Adviser"), 601 Second Avenue
South, Minneapolis, Minnesota 55480, serves as the investment adviser and
manager of the Funds through its First Asset Management group. The Adviser is a
national banking association that has professionally managed accounts for
individuals, insurance companies, foundations, commingled accounts, trust funds,
and others for over 75 years. The Adviser is a subsidiary of First Bank System,
Inc. ("FBS"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is a
regional, multi-state bank holding company headquartered in Minneapolis,
Minnesota. FBS is comprised of 13 banks and several trust and nonbank
subsidiaries, with 362 banking locations and 18 nonbank offices primarily in
Minnesota, Colorado, Illinois, Iowa, Kansas, Montana, Nebraska, North Dakota,
South Dakota, Wisconsin and Wyoming. Through its subsidiaries, FBS provides
consumer banking, commercial lending, financing of import/export trade, foreign
exchange and investment services as well as mortgage banking, trust, commercial
and agricultural finance, data processing, leasing and brokerage services.
Pursuant to an Investment Advisory Agreement dated as of October 1,
1996 (the "Advisory Agreement"), the Funds engage the Adviser to act as
investment adviser for and to manage the investment of the assets of the Funds.
Each Fund pays the Adviser monthly fees calculated on an annual basis equal to
0.25% of its average daily net assets.
The Advisory Agreement requires the Adviser to provide FASF with all
necessary office space, personnel and facilities necessary and incident to the
Adviser's performance of its services thereunder. The Adviser is responsible for
the payment of all compensation to personnel of FASF and the officers and
directors of FASF, if any, who are affiliated with the Adviser or any of its
affiliates. The Advisory Agreement provides that each Fund will be reimbursed by
the Adviser, in an amount not in excess of the advisory fees payable by such
Fund, for excess fund expenses as may be required by the laws of certain states
in which the Fund's shares may be offered for sale. As of the date of this
Statement of Additional Information, the most restrictive state limitation in
effect requires that "aggregate annual expenses" (which include the investment
advisory fee and other operating expenses but exclude interest, taxes, brokerage
commissions, Rule 12b-1 fees and certain other expenses) shall not
<PAGE>
exceed 2-1/2% of the first $30 million of average net assets, 2% of the next $70
million of average net assets and 1-1/2% of the remaining average net assets of
a Fund for any fiscal year.
In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Adviser or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
ADMINISTRATION AGREEMENT
SEI Investments Management Corporation (the "Administrator") serves as
administrator for the Funds pursuant to an Administration Agreement between it
and the Funds. The Administrator is a wholly-owned subsidiary of SEI Investments
Company, which also owns the Funds' distributor. See "-- Distributor and
Shareholder Service Plan and Agreement" below. Under the Administration
Agreement, the Administrator provides administrative personnel and services to
the Funds for a fee as described in the Funds' Prospectus. These services
include, among others, regulatory reporting, fund and portfolio accounting,
shareholder reporting services, and compliance monitoring services. The
Administrator also serves as administrator for the Underlying Funds and receives
compensation for such services.
DISTRIBUTOR AND SHAREHOLDER SERVICE PLAN AND AGREEMENT
SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the shares of each Fund. The Distributor is a wholly-owned
subsidiary of SEI Investments Company, which also owns the Funds' Administrator.
See "--Administration Agreement" above.
The Distributor serves as distributor for the shares of the Funds
pursuant to a Distribution Agreement dated as of October 1, 1996 (the
"Distribution Agreement") between itself and the Funds. Under the Distribution
Agreement, the Distributor has agreed to perform all distribution services and
functions of the Funds. The Distributor may enter into sub-distribution
agreements with securities firms, financial institutions (including, without
limitation, banks) and other industry professionals. The Distributor receives no
separate compensation for distribution of the Funds' Shares.
The Funds also have entered into a Shareholder Service Plan and
Agreement with the Distributor pursuant to which the Distributor agrees to
provide, or to enter into written agreements with service providers to provide,
one or more specified shareholder services to beneficial owners of shares of the
Funds. The Distributor has agreed that the services provided pursuant to the
Shareholder Service Plan and Agreement will in no event be primarily intended to
result in the sale of Fund shares. Pursuant to the Shareholder Service Plan and
Agreement, the Funds have agreed to pay the Distributor a fee at an annual rate
of 0.25% of the average net asset value of the shares of the Funds, computed
daily and paid monthly. The Distributor is to pay any shareholder service
providers with which it enters into written agreements out of this amount.
The Distributor also serves as distributor for the shares of the
Underlying Funds and receives compensation (but not with respect to the class of
shares purchased by the Funds) for such services.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is First Trust National Association
(the "Custodian"), First Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of First Bank System, Inc., which
also owns the Adviser.
The Custodian takes no part in determining the investment policies of
the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the
<PAGE>
investments of the Funds and all cash is held by the Custodian. The Custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits Fund assets in payment of Fund
expenses, pursuant to instructions of FASF's officers or resolutions of the
Board of Directors.
As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% of each Fund's average
daily net assets. In addition, the Custodian is reimbursed for its out-of-pocket
expenses incurred while providing its services to the Funds. The Custodian
continues to serve so long as its appointment is approved at least annually by
the Board of Directors including a majority of the directors who are not
interested persons (as defined under the 1940 Act) of FASF. The Custodian also
serves as custodian of the Underlying Funds' assets and receives compensation
for such services. In addition, the Custodian may serve as securities lending
agent for the Underlying Funds in connection with securities lending
transactions undertaken by the Underlying Funds, and it may receive compensation
for its provision of services as such securities lending agent.
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105, is
transfer agent and dividend disbursing agent for the shares of the Funds. DST
Systems, Inc. also serves as transfer agent and dividend disbursing agent for
the Underlying Funds.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Funds. Dorsey & Whitney LLP also
serves as independent General Counsel for the Underlying Funds.
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis, Minnesota
55402, acts as the Funds' independent auditors, providing audit services
including audits of the annual financial statements and assistance and
consultation in connection with SEC filings. KPMG Peat Marwick LLP also acts as
the Underlying Funds' independent auditors.
INVESTMENT ADVISORY SERVICES FOR THE UNDERLYING FUNDS
INVESTMENT ADVISORY AGREEMENTS OF THE UNDERLYING FUNDS
First Bank National Association ("First Bank"), the Adviser of the
Funds, also serves as investment adviser and manager of each of the Underlying
Funds through its First Asset Management group. For information concerning First
Bank, see "Investment Advisory and Other Services for the Funds -- Investment
Advisory Agreement" above.
Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the
"FAIF Advisory Agreement"), the Equity Funds and Fixed Income Fund engage First
Bank to act as investment adviser for and to manage the investment of the assets
of each such Underlying Fund. Each such Underlying Fund other than International
Fund pays First Bank monthly fees calculated on an annual basis equal to 0.70%
of its average daily net assets. International Fund pays First Bank monthly fees
calculated on an annual basis equal to 1.25% of its average daily net assets.
Pursuant to an Investment Advisory Agreement effective as of January
20, 1995 (the "FAF Advisory Agreement"), Prime Obligations Fund engages First
Bank to act as investment adviser for and to manage the investment of the assets
of Prime Obligations Fund. Prime Obligations Fund pays First Bank monthly fees
calculated on an annual basis equal to 0.40% of its average daily net assets.
The FAIF Advisory Agreement and the FAF Advisory Agreement require
First Bank to provide FAIF and FAF with all necessary office space, personnel
and facilities necessary and incident to First Bank's performance of its
services thereunder. First Bank is responsible for the payment of all
compensation to personnel of FAIF and FAF and the officers and directors of FAIF
and FAF, if any, who are affiliated with First Bank or any of its affiliates.
The FAIF Advisory Agreement and the FAF Advisory Agreement provide that each
Underlying Fund will be reimbursed by First Bank, in an amount not in excess of
the advisory fees payable by such Underlying Fund, for excess fund expenses as
may be
<PAGE>
required by the laws of certain states in which the Underlying Fund's shares may
be offered for sale. As of the date of this Statement of Additional Information,
the most restrictive state limitation in effect requires that "aggregate annual
expenses" (which include the investment advisory fee and other operating
expenses but exclude interest, taxes, brokerage commissions, Rule 12b-1 fees and
certain other expenses) shall not exceed 2-1/2% of the first $30 million of
average net assets, 2% of the next $70 million of average net assets and 1-1/2%
of the remaining average net assets of an Underlying Fund for any fiscal year.
In addition to the investment advisory fee, each Underlying Fund pays
all its expenses that are not expressly assumed by First Bank or any other
organization with which the Underlying Fund may enter into an agreement for the
performance of services. Each Underlying Fund is liable for such nonrecurring
expenses as may arise, including litigation to which the Underlying Fund may be
a party, and it may have an obligation to indemnify its directors and officers
with respect to such litigation.
Information concerning advisory fees paid by the Underlying Funds
during their three most recent fiscal years is set forth in their Statements of
Additional Information, which may be obtained by writing or calling SEI
Investments Distribution Co., Oaks, Pennsylvania 19456, telephone:
(800) 637-2548.
SUB-ADVISORY AGREEMENT FOR INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is sub-adviser for International Fund under an
agreement with First Bank (the "Sub-Advisory Agreement"). The sub-adviser, a
privately-held company, was founded in 1986 by David F. Marvin and Stanley
Palmer. The sub-adviser is engaged in the management of global, non-United
States and emerging markets equity portfolios for institutional accounts. At
September 30, 1996, the sub-adviser managed a total of $3.3 billion in
investments for 51 institutional investors. Pursuant to the Sub-Advisory
Agreement, the sub-adviser is responsible for the investment and reinvestment of
International Fund's assets and the placement of brokerage transactions in
connection therewith. Under the Sub-Advisory Agreement, the sub-adviser is
required, among other things, to report to First Bank or the FAIF Board
regularly at such times and in such detail as First Bank or the Board may from
time to time request in order to permit First Bank and the Board to determine
the adherence of International Fund to its investment objectives, policies and
restrictions. The Sub-Advisory Agreement also requires the sub-adviser to
provide all office space, personnel and facilities necessary and incident to the
sub-adviser's performance of its services under the Sub-Advisory Agreement.
For its services under the Sub-Advisory Agreement, the sub-adviser is
paid a monthly fee by First Bank calculated on an annual basis equal to 0.75% of
the first $100 million of International Fund's average daily net assets, 0.70%
of the second $100 million of International Fund's average daily net assets,
0.65% of the third $100 million of International Fund's average daily net
assets, and 0.60% of International Fund's average daily net assets in excess of
$300 million.
PORTFOLIO MANAGERS FOR THE UNDERLYING FUNDS
Stock Fund is managed by a committee comprised of Mr. Doak, Mr. Murphy,
Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Shields, and Mr. Twele. Equity Income
Fund and Diversified Growth Fund are managed by a committee comprised of Mr.
Bren, Mr. Doak, Mr. Dubiak, Ms. Johnson, Mr. Murphy, Mr. Whitcomb, and Mr.
Johnson. The remaining Underlying Funds are managed or co-managed as indicated
below.
James Doak and John M. Murphy, Jr. are members of the committees which
manage three of the Underlying Funds, as set forth above. Their biographies are
set forth in the Funds' Prospectus under the caption "Management -- Portfolio
Management of the Funds."
<PAGE>
James S. Rovner is a member of the committee which manages one of the
Underlying Funds, as set forth above, and he is portfolio manager for Special
Equity Fund. His biography is set forth in the Funds' Prospectus under the
caption "Management -- Portfolio Management of the Funds."
Gerald C. Bren is a member of the committee which manages two of the
Underlying Funds, as set forth above, and he is portfolio co-manager for
Emerging Growth Fund and Health Sciences Fund. His biography is set forth in the
Funds' Prospectus under the caption "Management -- Portfolio Management of the
Funds."
Albin S. Dubiak is a member of the committees which manage three of the
Underlying Funds, as set forth above, and he is portfolio co-manager for
Emerging Growth Fund, Regional Equity Fund, and Health Sciences Fund. His
biography is set forth in the Funds' Prospectus under the caption "Management --
Portfolio Management of the Funds."
Cori B. Johnson is a member of the committee which manages two of the
Underlying Funds, as set forth above, and she is portfolio manager for Real
Estate Securities Fund. Cori has been managing assets using quantitative
analysis techniques since 1992. She joined First Bank in 1991 as a securities
analyst. Cori received her bachelor's degree from Concordia College and her
master's degree in business administration from the University of Minnesota. She
is a Chartered Financial Analyst.
Roland P. Whitcomb, Jr. is a member of the committees which manage
three of the Underlying Funds, as set forth above, and he is portfolio
co-manager for Regional Equity Fund and Technology Fund. Roland jointed First
Bank in 1986 after serving as an account executive with Smith Barney & Co. since
1979. He received his bachelor's degree from the University of Chicago and is a
Chartered Financial Analyst.
Jeff A. Johnson is a member of the committee which manages two of the
Underlying Funds, as set forth above, and he is portfolio co-manager for
Regional Equity Fund and Technology Fund. Jeff has been employed by First Bank
in investment management since 1991 and in commercial lending from 1985 to 1991.
He received his master of arts degree from the University of Iowa.
Kevin Shields is a member of the committee which manages one of the
Underlying Funds, as set forth above. Kevin, who joined First Bank in 1993,
received his bachelor's degree from Marquette University and his master's degree
from the University of Wisconsin -- Madison.
John A. Twele is a member of the committee which manages one of the
Underlying Funds, as set forth above. Prior to joining First Bank in 1996, he
was employed in various positions at American Express Financial Advisors;
Investment Advisers, Inc.; Kemper Financial; and Mercantile Trust. John received
his bachelor's degree from Indiana University.
Martin L. Jones is portfolio manager for Fixed Income Fund. His
biography is set forth in the Funds' Prospectus under the caption "Management --
Portfolio Management of the Funds."
Joseph M. Ulrey III is portfolio co-manager for Prime Obligations Fund.
His biography is set forth in the Funds' Prospectus under the caption
"Management -- Portfolio Management of the Funds."
Jim Palmer is portfolio co-manager for Prime Obligations Fund. Jim
joined First Bank in 1992, prior to which he was a securities lending trader and
senior master trust accountant with First Trust National Association. He holds a
bachelor's degree from the University of Wisconsin -- LaCrosse and a masters's
of business administration degree from the University of Minnesota.
A committee comprised of the following seven individuals shares the
management of International Fund on behalf of its sub-adviser:
David F. Marvin is Chairman of the sub-adviser and founded the firm
together with Mr. Palmer in 1986. Before founding the sub-adviser, Mr. Marvin
was Vice President in charge of DuPont
<PAGE>
Corporation's $10 billion internally-managed pension fund. Prior to that Mr.
Marvin was Associate Portfolio Manager, and then Head Portfolio Manager, for
Investors Diversified Services' IDS Stock Fund. Mr. Marvin started in the
investment business in 1965 as a securities analyst for Chicago Title & Trust.
He received his bachelor's degree from the University of Illinois and his
master's degree in business administration from Northwestern University. He is a
Chartered Financial Analyst and a member of the Financial Analysts Federation.
Stanley Palmer is President of the sub-adviser and co-founder of the
firm. Mr. Palmer was Equity Portfolio Manager for DuPont Corporation from 1978
through 1986, an analyst and portfolio manager at Investors Diversified Services
from 1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. He received his bachelor's degree from Gustavus Adolphus College
and his master's degree in business administration from the University of Iowa.
He is a Chartered Financial Analyst and a member of the Financial Analysts
Federation.
William E. Dodge has been Senior Managing Director and Portfolio
Manager of the sub-adviser since 1996. Mr. Dodge was Chief Investment Strategist
and Chairman of the Investment Policy Committee of Dean Witter in New York from
1991 to 1996, and he served as a Senior Portfolio Manager, Director of
Quantitative Equity Strategies, and United States equity analyst at the DuPont
Corporation pension fund from 1983 to 1991. From 1976 to 1983 Mr. Dodge served
in various United States portfolio management and analytical positions including
senior investment manager of a bank trust department from 1981 to 1983. He
received his bachelor's degree and his master's degree in business
administration from the University of Massachusetts at Amherst. He is a
Chartered Financial Analyst and a member of the Financial Analysts Federation.
Terry B. Mason is a Senior Vice President and Portfolio Manager of the
sub-adviser. Before joining the sub-adviser, Mr. Mason was employed for 14 years
by DuPont Corporation, the last five as international equity analyst and
international trader. He received his bachelor's degree from Glassboro State
College and his master's degree in business administration from Widener
University.
Jay F. Middleton is a Vice President and Portfolio Manager for the
sub-adviser and joined the firm in 1989. He received his bachelor's degree from
Wesleyan University.
Todd D. Marvin is a Vice President and Portfolio Manager for the
sub-adviser and joined the firm in 1991. Before joining the sub-adviser, Mr.
Marvin was employed by Oppenheimer & Company as an analyst in investment
banking. Mr. Marvin received his bachelor's degree from Wesleyan University.
David L. Schaen is a Vice President and Portfolio Manager for the
sub-adviser. Before becoming a Portfolio Manager, Mr. Schaen was Head Trader for
the sub-adviser from 1991 to 1994 and an International Analyst for the
sub-adviser from 1994 to 1995. Prior to 1991 he was Head Trader and Investment
Officer at the Bank of Delaware. He received his bachelor's degree from the
University of Delaware and his master's degree in business administration from
Widener University.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
It anticipated that the majority of the Funds' portfolio transactions
will consist of purchases and sales of shares of the Underlying Funds. These
purchases and sales will be made directly with the Underlying Funds. The class
of shares of the Underlying Funds in which the Funds will invest is not subject
to any front-end or deferred sales charges, any Rule 12b-1 distribution fees or
any shareholder servicing fees.
To the extent that the Funds may purchase or sell securities other than
shares of the Underlying Funds, decisions with respect to placement of the
Funds' portfolio transactions are made by the Adviser. The Funds' policy is to
seek to place portfolio transactions with brokers or dealers who will execute
transactions as efficiently as possible and at the most favorable price. The
Adviser may, however, select a broker or dealer to effect a particular
transaction without communicating with all
<PAGE>
brokers or dealers who might be able to effect such transaction because of the
volatility of the market and the desire of the Adviser to accept a particular
price for a security because the price offered by the broker or dealer meets
guidelines for profit, yield or both. Some portfolio transactions may involve
payment of a brokerage commission by the appropriate Fund. In some cases,
transactions may be with dealers or issuers who act as principal for their own
accounts and not as brokers. Transactions effected on a principal basis are made
without the payment of brokerage commissions but at net prices, which usually
include a spread or markup. In effecting transactions in over-the-counter
securities, the Funds expect to deal with market makers unless it appears that
better price and execution are available elsewhere.
While the Adviser does not deem it practicable and in the Funds' best
interest to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given by the Adviser to posted commission rates
as well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
Subject to the policy of seeking favorable price and execution for the
transaction size and risk involved, in selecting brokers and dealers other than
the Distributor and determining commissions paid to them, the Adviser may
consider ability to provide supplemental performance, statistical and other
research information as well as computer hardware and software for research
purpose for consideration, analysis and evaluation by the staff of the Adviser.
In accordance with this policy, the Funds do not execute brokerage transactions
solely on the basis of the lowest commission rate available for a particular
transaction. Subject to the requirements of favorable price and efficient
execution, placement of orders by securities firms for the purchase of shares of
the Funds may be taken into account as a factor in the allocation of portfolio
transactions.
Research services that may be received by the Adviser would include
advice, both directly and in writing, as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities, as well as
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. The
research services may allow the Adviser to supplement its own investment
research activities and enable the Adviser to obtain the views and information
of individuals and research staffs of many different securities firms prior to
making investment decisions for the Funds. To the extent portfolio transactions
are effected with brokers and dealers who furnish research services, the Adviser
would receive a benefit, which is not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Funds from these
transactions. Research services furnished by brokers and dealers used by the
Funds for portfolio transactions may be utilized by the Adviser in connection
with investment services for other accounts and, likewise, research services
provided by brokers and dealers used for transactions of other accounts may be
utilized by the Adviser in performing services for the Funds. The Adviser
determine the reasonableness of the commissions paid in relation to their view
of the value of the brokerage and research services provided, considered in
terms of the particular transactions and their overall responsibilities with
respect to all accounts as to which they exercise investment discretion.
The Adviser has not entered into any formal or informal agreements with
any broker or dealer, and do not maintain any "formula" that must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided to the Adviser, except as noted below. The Adviser
may, from time to time, maintain an informal list of brokers and dealers that
will be used as a general guide in the placement of Fund business in order to
encourage certain brokers and dealers to provide the Adviser with research
services, which the Adviser anticipates will be useful to it. Any list, if
maintained, would be merely a general guide, which would be used only after the
primary criteria for the selection of brokers and dealers (discussed above) had
been met, and, accordingly, substantial deviations from the list could occur.
The Adviser would authorize the Funds to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker or dealer would have charged only if the Adviser determined in good faith
that the amount of such commission was reasonable in relation to the value of
the brokerage and research services
<PAGE>
provided by such broker or dealer, viewed in terms of either that particular
transaction or the overall responsibilities of the Adviser with respect to the
Funds.
The Funds do not effect any brokerage transactions in their portfolio
securities with any broker or dealer affiliated directly or indirectly with the
Adviser or the Distributor unless such transactions, including the frequency
thereof, the receipt of commissions payable in connection therewith, and the
selection of the affiliated broker or dealer effecting such transactions are not
unfair or unreasonable to the shareholders of the Funds, as determined by the
Board of Directors. Any transactions with an affiliated broker or dealer must be
on terms that are both at least as favorable to the Funds as the Funds can
obtain elsewhere and at least as favorable as such affiliated broker or dealer
normally gives to others.
When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the Adviser to be equitable to each
client. In some cases, this system could have a detrimental effect on the price
or volume of the security as far as each client is concerned. In other cases,
however, the ability of the clients to participate in volume transactions may
produce better executions for each client.
The policies of the Underlying Funds with respect to portfolio
transactions and the allocation of brokerage, and the brokerage commissions paid
by them during their three most recent fiscal years, are set forth in their
Statements of Additional Information, which may be obtained by writing or
calling SEI Investments Distribution Co., Oaks, Pennsylvania 19456, telephone:
(800) 637-2548.
<PAGE>
CAPITAL STOCK
As of September 16, 1996, the directors and officers of FASF as a group
owned less than one percent of each Fund's outstanding shares. As of that date,
the Funds were aware that the following persons owned of record five percent or
more of the outstanding shares of each class of stock of the Funds.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED
<S> <C>
INCOME FUND
SEI Investments Distribution Co. ...................................................... 100%
Oaks, Pennsylvania 19456
GROWTH AND INCOME FUND
SEI Investments Distribution Co. ...................................................... 100%
Oaks, Pennsylvania 19456
GROWTH FUND
SEI Investments Distribution Co. ...................................................... 100%
Oaks, Pennsylvania 19456
AGGRESSIVE GROWTH FUND
SEI Investments Distribution Co. ...................................................... 100%
Oaks, Pennsylvania 19456
</TABLE>
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the shares of
the Funds is summarized in the Prospectus under the caption "Investing in the
Funds." The net asset value of each Fund's shares is determined on each day
during which the New York Stock Exchange (the "NYSE") is open for business. The
NYSE is not open for business on the following holidays (or on the nearest
Monday or Friday if the holiday falls on a weekend): New Year's Day, Martin
Luther King, Jr. Birthday, Washington's Birthday (observed), Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Each year the NYSE may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future.
FUND PERFORMANCE
SEC STANDARDIZED PERFORMANCE FIGURES
YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period.
Such yield figures are determined by dividing the net investment income
per share earned during the specified 30-day period by the maximum offering
price per share on the last day of the period, according to the following
formula:
Yield = 2 [((a - b) / cd) + 1)6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = maximum offering price per share on
the last day of the period
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and (ii) deducts all recurring fees, such as advisory fees, charged
as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by finding
the cumulative compounded rate of return over the period indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
<PAGE>
CTR = ((ERV - P) / P ) 10
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of, the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts all recurring fees, such as advisory fees,
charged as expenses to all shareholder accounts.
NON-STANDARD DISTRIBUTION RATES
HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period.
ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month by the number of days in that month and multiplying by 365, and
dividing the resulting figure by the maximum offering price on the last day of
the specified period.
CERTAIN PERFORMANCE COMPARISONS
The Funds may compare their performance to that of certain published or
otherwise widely disseminated indices or averages compiled by third parties.
These indices and averages are as follows, among others:
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS ("S&P
500") is a composite index of common stocks in industrial, transportation, and
financial and public utility companies. The S&P 500 index assumes reinvestment
of all dividends paid by stocks listed in its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated in
Standard & Poor's figures.
RUSSELL 2000 INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used to
compare to the total returns of funds whose portfolios are invested primarily in
small capitalization common stocks.
LIPPER BALANCED AVERAGE is an average of funds whose primary objective
is to conserve principal by maintaining at all times a balanced portfolio of
both stocks and bonds.
LIPPER FLEXIBLE PORTFOLIO AVERAGE is an average of funds which allocate
investments across various asset classes, including domestic common stocks,
bonds and money market instruments, with a focus on total return.
LIPPER GENERAL BOND FUND AVERAGE is an average of funds which invest
primarily in corporate and government debt issues without quality or maturity
restrictions.
LIPPER MONEY MARKET INSTRUMENT AVERAGE is an average of money market
funds which invest in high financial instruments rated in the top two grades.
LIPPER INTERNATIONAL AVERAGE is an average of funds which invest
primarily in equity securities whose primary trading markets are outside the
United States.
LIPPER GENERAL EQUITY FUND AVERAGE is an average of the Lipper Capital
Appreciation Average, Lipper Growth Average, Lipper Mid-Cap Average, Lipper
Small Company Growth Average, Lipper Growth & Income Average, Lipper Standard &
Poor's 500 Index Objective Average and Lipper Standard & Poor's Equity Income
Average.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST
("EAFE") INDEX is an aggregate of 15 individual country indices that
collectively represent many of the major markets of the world, excluding the
United States and Canada.
LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is a market weighted index
comprised of all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues; all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government; and all publicly issued, fixed rate, nonconvertible investment
grade dollar-denominated SEC-registered corporate debt.
<PAGE>
SALOMON BROTHERS 3-MONTH U.S. TREASURY BILL INDEX represents monthly
return equivalents of yield averages which are not marked to market.
In addition, the Funds may compare their performance to composites
constructed from the foregoing indices and averages.
TAXATION
The tax status of the Funds and the distributions that the Funds will
make to shareholders are summarized in the Prospectus in the section entitled
"Federal Income Taxes." Each Fund intends to fulfill the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. If so qualified, each Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.
To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; (3) derive less than 30% of its
annual gross income from the sale or other disposition of stock, securities,
options, futures, or forward contracts held for less than three months; and (4)
diversify its holdings so that, at the end of each fiscal quarter of the Fund,
(a) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. Government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount no greater than 5% of the Fund's
total assets and no greater than 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the market value of the Fund's total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies).
Each Fund is subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed for each calendar year
over the amount actually distributed. For this purpose, any amount on which the
Fund is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Fund must
declare and pay dividends representing 98% of its net investment income for that
calendar year and 98% of its capital gains (both long-term and short-term) for
the twelve-month period ending October 31 of the calendar year.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale or exchange of such shares will be treated as a long-term capital loss to
the extent of such long-term capital gain distribution.
For federal tax purposes, if a shareholder exchanges shares of a Fund
for shares of any other Fund pursuant to the exchange privilege (see "Investing
in the Funds -- Exchange Privilege" in the Prospectus), such exchange will be
considered a taxable sale of the shares being exchanged.
Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who, as to the United States, is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate,
<PAGE>
foreign corporation, or foreign partnership (a "foreign shareholder") will be
subject to U.S. withholding tax (at a rate of 30% or lower treaty rate).
Withholding will not apply if a dividend paid by a Fund to a foreign shareholder
is `'effectively connected" with a U.S. trade or business of such shareholder,
in which case the reporting and withholding requirements applicable to U.S.
citizens or domestic corporations will apply. Distributions of net long-term
capital gains are not subject to tax withholding but, in the case of a foreign
shareholder who is a nonresident alien individual, such distributions ordinarily
will be subject to U.S. income tax at a rate of 30% if the individual is
physically present in the U.S. for more than 182 days during the taxable year.
Each Fund will report annually to its shareholders the amount of any
withholding.
The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Underlying Funds are not
required to dispose of a security if its rating declines after it is purchased,
although they may consider doing so.
RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS
STANDARD & POOR'S CORPORATION
AAA: Securities rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only to a
small degree.
A: Securities rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Although such securities normally
exhibit adequate protection standards, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for securities in this category
than for those in higher rated categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
<PAGE>
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating.
CCC: Securities rated CCC have a currently identifiable vulnerability
to default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are
generally known as high grade securities. They are rated lower than the
best securities because margins of protection may not be as large as in
Aaa securities, or fluctuation of protective elements may be of greater
magnitude, or there may be other elements present which make the
long-term risks appear somewhat greater than in Aaa securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative elements;
its future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes issues in this class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
<PAGE>
Caa: An issue which is rated Caa is of poor standing. Such an issue may
be in default or there may be present elements of danger with respect
to principal or interest.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality, and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S CORPORATION. Standard & Poor's ratings for preferred
stock have the following definitions:
AAA: An issue rated "AAA" has the highest rating that may be assigned
by Standard & Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
category.
MOODY'S INVESTORS SERVICE, INC. Moody's ratings for preferred stock
include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
<PAGE>
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S CORPORATION. Commercial paper ratings are graded into
four categories, ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds or the
Underlying Funds will purchase commercial paper rated A-3 or lower.
MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions as to the ability of the issuers to timely repay promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representation that such obligations are exempt from registration under the
Securities Act of 1933, and it does not represent that any specific instrument
is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment.
PRIME-3: Acceptable capacity for repayment.
None of the Funds or the Underlying Funds will purchase Prime-3 commercial
paper.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.
FINANCIAL STATEMENTS
The Funds' audited statement of assets and liabilities is attached to
this Statement of Additional Information.
