RULE 497(e)
FIRST AMERICAN STRATEGY FUNDS, INC.
STRATEGY INCOME FUND STRATEGY GROWTH AND INCOME FUND
STRATEGY GROWTH FUND STRATEGY AGGRESSIVE FUND
Supplement dated July 24, 1998
to
Prospectus dated January 31, 1998, as supplemented
May 15, 1998 and July 24, 1998
This supplement updates the aforementioned Prospectus to provide
that Mid Cap Growth Fund and Emerging Markets Fund will not constitute
Underlying Funds prior to August 10, 1998.
JANUARY 31, 1998
AS SUPPLEMENTED ON MAY 15, 1998 AND JULY 24, 1998
STRATEGY FUNDS
STRATEGY INCOME FUND
STRATEGY GROWTH AND INCOME FUND
STRATEGY GROWTH FUND
STRATEGY AGGRESSIVE GROWTH FUND
FIRST AMERICAN
STRATEGY FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
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TABLE OF CONTENTS
Summary 2
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Fees and Expenses 5
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Financial Highlights 8
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The Funds 10
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Investment Objectives and Policies 10
...........................................
The Underlying Funds 14
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Management 26
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Distributor 30
...........................................
Investing in the Funds 31
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Redeeming Shares 34
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Determining the Price of Shares 36
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Federal Income Taxes 37
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Fund Shares 38
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Calculation of Performance Data 38
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Special Investment Methods 39
...........................................
Information Concerning Compensation Paid
to U.S. Bank National Association and
Other Affiliates 51
...........................................
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FIRST AMERICAN STRATEGY FUNDS, INC.
PROSPECTUS
The shares described in this Prospectus represent interests in First
American Strategy Funds, Inc., which consists of the following mutual funds
(the "Funds"):
* INCOME FUND
* GROWTH AND INCOME FUND
* GROWTH FUND
* AGGRESSIVE GROWTH FUND
As described in this Prospectus, the Funds' investment objectives are
intended to provide differing balances between the objectives of current
income and of growth of capital. 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, U.S. Bank National
Association acting through its First American Asset Management group. In
managing the Funds, the investment advisor will allocate and re-allocate the
Funds' assets among such other mutual funds within predetermined ranges,
expressed as percentages of the Funds' net assets.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION AND ANY OF ITS
AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN
THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL,
DUE TO FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated January 31, 1998 as supplemented
on May 15, 1998 and July 24, 1998, for the Funds has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated in its
entirety by reference in this Prospectus. To obtain copies of the Statement
of Additional Information at no charge, or to obtain other information or
make inquiries about the Funds, call (888) 997-8728 or write SEI Investments
Distribution Co., Oaks, Pennsylvania 19456. The SEC maintains a World Wide
Web site that contains reports and information regarding issuers that file
electronically with the SEC. The address of such site is
"http://www.sec.gov."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 31, 1998 as supplemented on May 15,
1998 and July 24, 1998.
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SUMMARY
First American Strategy Funds, Inc. ("FASF") is an open-end investment
company which offers shares in four different mutual funds (the "Funds").
The Funds' investment objectives are intended to provide differing balances
between the objectives of current income and of growth of capital. These
investment objectives are as follows:
INCOME FUND seeks to provide a high level of current income consistent with
limited risk to capital. The Fund's limited equity component is designed to
help offset inflation and provide a source for potential increases in income
over time.
GROWTH AND INCOME FUND seeks to provide both capital growth and current
income through a balanced approach to equity securities and fixed-income
investments.
GROWTH FUND seeks to provide capital growth with a moderate level of current
income. The Fund provides high allocations to various equity categories
including small company and international company equity securities.
AGGRESSIVE GROWTH FUND seeks to provide a high level of capital growth. The
Fund provides high allocations to various equity categories including small
company and international company equity securities and may include high
allocations to technology and health care company equity securities.
Each Fund seeks to achieve its investment objectives by investing primarily
in a variety of other mutual funds (the "Underlying Funds") which are also
advised by the Funds' investment advisor. In managing the Funds, the
investment advisor will allocate and re-allocate the Funds' assets among the
Underlying Funds within predetermined ranges, expressed as percentages of
the Funds' net assets. These ranges, and the investment advisor's
allocations within the ranges, are intended to reflect the Funds' differing
balances between the investment objectives of current income and of growth
of capital.
The Underlying Funds include ten equity funds, two fixed income funds, and
one money market fund. The equity funds and the fixed income funds comprise
separate series of First American Investment Funds, Inc. ("FAIF"), and the
money market fund comprises a separate series of First American Funds, Inc.
("FAF"). The predetermined ranges within which the Funds' assets may be
allocated are set forth below under the caption "Investment Objectives and
Policies," and detailed information concerning the Underlying Funds is set
forth below under the caption "The Underlying Funds." Each of the Funds is a
non-diversified investment company, as defined in the Investment Company Act
of 1940 (the "1940 Act").
INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank"), acting through its First American Asset Management group, serves
as investment advisor to each of the Funds. See "Management."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management" and "Distributor."
OFFERING PRICES; EXPENSES. Shares of the Funds are sold at net asset value
without any front-end or deferred sales charges. Shares of each Fund are
subject to a shareholder servicing fee computed at an annual rate of 0.25%
of average daily net assets. See "Investing in the Funds" and
"Distributor."
Investors in the Funds will bear their proportionate share of the expenses
of the Funds (including operating costs, administrative fees and, to the
extent not waived, investment advisory fees) and, in addition, will
indirectly bear similar expenses of the Underlying Funds. Some investors
(primarily certain institutional investors which are eligible to purchase
the "no load" class of Underlying Fund shares) might be able to realize
lower aggregate charges and expenses by investing directly in the Underlying
Funds, rather than investing indirectly in the Underlying Funds by
purchasing Fund shares. An investor who chooses to invest directly in the
Underlying Funds rather than purchasing Fund shares would, however, forego
the asset allocation services provided by
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the Advisor in its management of the Funds. See "Fees and Expenses --
Information Concerning Fees and Expenses."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS. The minimum initial investment
is $1,000 ($250 for IRAs) for each Fund. Subsequent investments must be
$100 or more. Regular investment in the Funds is simplified through the
Systematic Investment Program through which monthly purchases of $100 or
more are possible. See "Investing in the Funds -- Minimum Investment
Required" and "-- Systematic Investment Program."
EXCHANGES. Shares of any Fund may be exchanged for shares of any other
Fund at the shares' respective net asset values with no additional charge.
Shares of the Funds may not be exchanged for shares of the Underlying
Funds, other than Class A Shares of FAF's Prime Obligations Fund. See
"Investing in the Funds -- Exchange Privilege."
REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent. Each Fund may, upon 60 days written notice, redeem
an account if the account's net asset value falls below $500. See
"Investing in the Funds" and "Redeeming Shares."
RISKS TO CONSIDER. An investment in any of the Funds involves certain
risks. These include the following:
ACTIVE MANAGEMENT. The performance of the Funds will reflect in part the
ability of the Advisor to make asset allocation and other investment
decisions which are suited to achieving the Funds' investment objectives.
Due to their active management, the Funds could underperform other mutual
funds with similar investment objectives.
ADDITIONAL EXPENSES. Investing in the Underlying Funds through the Funds
involves certain additional expenses that would not be present in a direct
investment in the Underlying Funds. See "Fees and Expenses -- Information
Concerning Fees and Expenses."
RISKS ASSOCIATED WITH THE UNDERLYING FUNDS. The risks associated with the
Underlying Funds are discussed in greater detail under "The Underlying
Funds." These risks include, among others:
* The Underlying Funds are actively managed, and therefore may
underperform other mutual funds with similar investment objectives.
* Each of the Underlying Funds is subject to the risk of generally adverse
markets. In general, the market prices of equity securities frequently
are subject to greater volatility than the prices of fixed income
securities. Therefore, it may be expected that the net asset values of
Underlying Funds which are permitted to invest higher proportions of
their assets in equity funds may be more volatile than Underlying Funds
which are limited to lower proportions.
* Certain of the Underlying Funds may (i) invest in small-capitalization
companies; (ii) concentrate their investments in a single or related
economic sectors; (iii) invest in real estate investment trusts; (iv)
invest in securities of foreign issuers; (v) in the case of two
Underlying Funds, invest a significant portion of their assets in less
than investment grade debt securities; and (vi) engage (but not for
speculative purposes) in options and futures transactions.
* The Underlying Funds which invest primarily in debt securities are
subject to interest rate risk, credit risk, call risk, and certain risks
associated with investing in mortgage-backed securities. In addition, to
the limited extent to which several other Underlying Funds may invest in
fixed-rate debt securities, they also are subject to interest rate risk,
credit risk, and call risk.
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POSSIBLE CONFLICTS OF INTEREST AND RECEIPT OF SECURITIES. It is possible
that situations could arise in which the interests of the Funds diverge from
those of the Underlying Funds. Since the Funds and the Underlying Funds have
a common investment advisor and common officers and directors, such
situations could place these persons in a position in which their duties to
the Funds conflict with their duties to the Underlying Funds. In order to
resolve some types of conflicts, an Underlying Fund could determine to meet
a redemption request by a Fund by distributing securities from its portfolio
to the Fund rather than by paying cash. Any securities received by a Fund as
a result of such an in-kind redemption would be held by the Fund until the
Advisor determines that it is appropriate to dispose of such securities. See
"Investment Objectives and Policies -- Possible Conflicts of Interest and
Receipt of Securities."
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(888) 997-8728, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
The following tables set forth the shareholder transaction expenses and the
direct annual operating expenses that a shareholder bears in connection with
an investment in the Funds' shares. As illustrated in the other tables under
this caption, Fund shareholders also indirectly bear their proportionate
share of the Underlying Funds' expenses.
<TABLE>
<CAPTION>
GROWTH
AND AGGRESSIVE
INCOME INCOME GROWTH GROWTH
FUND FUND FUND FUND
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None None None
Maximum sales load imposed on reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
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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(1) 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%
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</TABLE>
(1) THE ADVISOR 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 ADVISOR 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 1.75% FOR INCOME FUND;
1.85% FOR GROWTH AND INCOME FUND; 2.37% FOR GROWTH FUND AND 2.60% FOR
AGGRESSIVE GROWTH FUND; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 2.00% FOR INCOME FUND; 2.10% FOR GROWTH AND INCOME FUND;
2.62% FOR GROWTH FUND AND 2.85% FOR AGGRESSIVE GROWTH FUND. "OTHER EXPENSES"
INCLUDES AN ADMINISTRATION FEE AND IS BASED ON ESTIMATED AMOUNTS FOR THE
CURRENT FISCAL YEAR.
<PAGE>
FEES AND EXPENSES (continued)
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RANGES OF COMBINED DIRECT AND INDIRECT EXPENSE RATIOS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
As noted above, in addition to the Funds' direct expenses, Fund shareholders
also indirectly bear their proportionate share of the Underlying Funds'
expenses. The following table sets forth the ranges of combined direct and
indirect expense ratios borne by Fund shareholders after voluntary fee
waivers and reimbursements, taking into account Underlying Fund expenses
indirectly borne by Fund shareholders. Ranges are presented because the
Underlying Funds' expense ratios differ from one another, so that the actual
combined direct and indirect expense ratios of the Funds will depend on the
allocation of Fund assets among the Underlying Funds. Information concerning
the Underlying Funds' expense ratios is set forth under "-- Underlying Fund
Expense Ratios" below.
<TABLE>
<CAPTION>
RANGES OF COMBINED DIRECT AND INCOME GROWTH AND GROWTH AGGRESSIVE
INDIRECT EXPENSE RATIOS FUND INCOME FUND FUND GROWTH FUND
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0.90% to 0.90% to 0.91% to 0.93% to
1.03% 1.27% 1.36% 1.38%
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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:
INCOME GROWTH AND GROWTH AGGRESSIVE
FUND INCOME FUND FUND GROWTH FUND
- --------------------------------------------------------------------------------------------
1 year $ 10 $ 11 $ 12 $ 12
3 years $ 31 $ 35 $ 36 $ 37
5 years $ 54 $ 60 $ 63 $ 64
10 years $119 $133 $139 $141
</TABLE>
(2) ABSENT THE FEE WAIVERS AND REIMBURSEMENTS REFERRED TO IN (1) ABOVE, THE
DOLLAR AMOUNTS FOR THE 1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS:
INCOME FUND, $27, $84, $143 AND $304; GROWTH AND INCOME FUND, $30, $91, $154
AND $325; GROWTH FUND, $35, $108, $182 AND $378; AND AGGRESSIVE GROWTH FUND,
$38, $115, $193 AND $399.
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UNDERLYING FUND EXPENSE RATIOS
The expense ratios of the Underlying Funds in which the respective Funds may
invest are as set forth in the table below. The information in the table is
for Class Y Shares of the Underlying Funds, which is the only class in which
the Funds will invest. The ratios presented reflect existing voluntary fee
waiver and reimbursement arrangements with respect to the Underlying Funds.
These arrangements may be discontinued at any time, in which event the
Underlying Funds' expense ratios would be higher.
EXPENSE
UNDERLYING FUND RATIO(3)
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Real Estate Securities Fund(4)(5) 0.80%
Equity Income Fund(4)(5)(6) 0.75%
Large Cap Value Fund(7) 0.80%
Large Cap Growth Fund(7) 0.80%
Mid Cap Value Fund(6)(7) 0.89%
Small Cap Growth Fund(7) 0.90%
Small Cap Value Fund 0.90%
International Fund(7) 1.35%
Mid Cap Growth Fund(7) 0.87%
Emerging Markets Fund(7) 1.45%
Fixed Income Fund 0.70%
Strategic Income Fund 0.90%
Prime Obligations Fund 0.45%
- --------------------------------------------------------------------------------
(3) EXPENSE RATIOS ARE BASED ON INFORMATION AS OF SEPTEMBER 30, 1997, FOR ALL
UNDERLYING FUNDS OTHER THAN STRATEGIC INCOME FUND, MID CAP GROWTH FUND AND
EMERGING MARKETS FUND, WHICH HAD NOT YET COMMENCED OPERATIONS. EXPENSE
RATIOS FOR THESE UNDERLYING FUNDS ARE BASED ON ESTIMATED "OTHER EXPENSES"
AND EXISTING VOLUNTARY FEE WAIVER AND REIMBURSEMENT ARRANGEMENTS. ABSENT
VOLUNTARY FEE WAIVER AND REIMBURSEMENT ARRANGEMENTS, THESE EXPENSE RATIOS
WOULD BE AS FOLLOWS: REAL ESTATE SECURITIES FUND, 1.05%; EQUITY INCOME FUND,
0.92%; LARGE CAP VALUE FUND, 0.89%; LARGE CAP GROWTH FUND, 0.89%; MID CAP
VALUE FUND, 0.90%; SMALL CAP GROWTH FUND, 0.91%; SMALL CAP VALUE FUND,
0.90%; INTERNATIONAL FUND, 1.67%; MID CAP GROWTH FUND, 0.87%; EMERGING
MARKETS FUND, 2.00%; FIXED INCOME FUND, 0.88%; STRATEGIC INCOME FUND, 0.90%;
AND PRIME OBLIGATIONS FUND, 0.52%.
(4) GROWTH FUND IS NOT PERMITTED TO INVEST IN THIS UNDERLYING FUND.
(5) AGGRESSIVE GROWTH FUND IS NOT PERMITTED TO INVEST IN THIS UNDERLYING FUND.
(6) GROWTH AND INCOME FUND IS NOT PERMITTED TO INVEST IN THIS UNDERLYING FUND.
(7) INCOME FUND IS NOT PERMITTED TO INVEST IN THIS UNDERLYING FUND.
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INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights should be read in conjunction with the
Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in FASF's annual report
to shareholders for the year ended September 30, 1997. Further information
about the Funds' performance is contained in such annual report to
shareholders, which may be obtained without charge by calling (888) 997-8728
or by writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
For the period ended September 30, 1997
For a share outstanding throughout the period.
<TABLE>
<CAPTION>
REALIZED
NET ASSET AND DIVIDENDS
VALUE NET UNREALIZED FROM NET
BEGINNING INVESTMENT GAINS ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME FUND(1) $10.00 $0.41 $0.82 $(0.41)
GROWTH AND INCOME FUND(1) $10.00 $0.26 $1.76 $(0.26)
GROWTH FUND(1) $10.00 $0.18 $2.12 $(0.18)
AGGRESSIVE GROWTH FUND(1) $10.00 $0.11 $2.58 $(0.11)
- --------------------------------------------------------------------------------------
</TABLE>
+ RETURNS ARE FOR THE PERIODS INDICATED AND HAVE NOT BEEN ANNUALIZED.
(1) COMMENCED OPERATIONS ON OCTOBER 1, 1996. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
(2) EXPENSE RATIOS DO NOT INCLUDE EXPENSES OF THE UNDERLYING FUNDS.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS
END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING PORTFOLIO
PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.82 12.51%+ $36,119 0.60%(2) 4.39% 2.00%(2) 29%
$11.76 20.47%+ $27,565 0.60%(2) 2.59% 2.10%(2) 37%
$12.12 23.23%+ $15,676 0.60%(2) 1.61% 2.62%(2) 6%
$12.58 27.06%+ $13,725 0.60%(2) 0.76% 2.85%(2) 7%
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</TABLE>
<PAGE>
THE FUNDS
FASF is an open-end management investment company which offers shares in
several different mutual funds, each of which evidences an interest in a
separate and distinct investment portfolio. FASF was incorporated under the
laws of the State of Minnesota in 1996, and its principal offices are
located at Oaks, Pennsylvania 19456. The Board of Directors of FASF may
authorize additional series or classes of common stock in the future. Each
of the Funds pays its expenses, including the fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy
solicitation materials and reports to shareholders, costs of custodial
services and registering shares under federal and state securities laws,
pricing, insurance expenses, brokerage costs, interest charges, taxes,
directors' fees and organization expenses.
INVESTMENT OBJECTIVES AND POLICIES
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OBJECTIVES
The investment objectives of the Funds are as follows:
INCOME FUND seeks to provide a high level of current income consistent with
limited risk to capital. The Fund's limited equity component is designed to
help offset inflation and provide a source for potential increases in income
over time.
GROWTH AND INCOME FUND seeks to provide both capital growth and current
income through a balanced approach to equity securities and fixed-income
investments.
GROWTH FUND seeks to provide capital growth with a moderate level of current
income. The Fund provides high allocations to various equity categories
including small company and international company equity securities.
AGGRESSIVE GROWTH FUND seeks to provide a high level of capital growth. The
Fund provides high allocations to various equity categories including small
company and international company equity securities and may include high
allocations to technology and health care company equity securities.
There is no assurance that any of these objectives will be achieved. The
investment objectives of the Funds are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders
considered appropriate at the time of their investment in a Fund.
Shareholders will receive written notification at least 30 days prior to a
change in a Fund's investment objectives.
<PAGE>
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INVESTMENT POLICIES
Each Fund seeks to achieve its investment objectives by investing in a variety
of the Underlying Funds. The Underlying Funds include the ten Equity Funds named
in the table below, the Fixed Income Funds named below and Prime Obligations
Fund (a money market fund). In managing the Funds, the Advisor will allocate and
re-allocate their assets among the Underlying Funds within the following ranges,
expressed as percentages of the Funds' net assets:
<TABLE>
<CAPTION>
GROWTH AND AGGRESSIVE
INCOME FUND INCOME FUND GROWTH FUND GROWTH FUND
------------------- ------------------- ------------------- ------------------
UNDERLYING FUNDS MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS AS A WHOLE 15% 45% 35% 75% 50% 90% 60% 100%
Real Estate Securities Fund 0% 15% 0% 15% 0% 0% 0% 0%
Equity Income Fund 15% 45% 0% 0% 0% 0% 0% 0%
Large Cap Value Fund 0% 0% 5% 35% 5% 40% 5% 45%
Large Cap Growth Fund 0% 0% 5% 35% 5% 40% 5% 45%
Mid Cap Value Fund 0% 0% 0% 20% 0% 30% 5% 45%
Small Cap Growth Fund 0% 0% 0% 20% 0% 30% 0% 40%
Small Cap Value Fund 0% 0% 0% 20% 0% 30% 0% 40%
International Fund 0% 0% 0% 20% 0% 30% 0% 35%
Mid Cap Growth Fund 0% 0% 0% 20% 0% 30% 5% 45%
Emerging Markets Fund 0% 0% 0% 10% 0% 15% 0% 15%
FIXED INCOME FUNDS AS A WHOLE 55% 85% 25% 65% 10% 50% 0% 40%
Fixed Income Fund 25% 85% 10% 65% 0% 50% 0% 40%
Strategic Income Fund 0% 25% 0% 20% 0% 20% 0% 15%
PRIME OBLIGATIONS FUND 0% 25% 0% 35% 0% 35% 0% 35%
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</TABLE>
The ranges set forth above, and the Advisor's allocations within the ranges,
are intended to reflect the Funds' differing balances between the investment
objectives of current income and of growth of capital. The Funds may make
alterations to the ranges and the Underlying Funds set forth above without
shareholder approval, provided that this Prospectus is appropriately amended
or supplemented. Detailed information concerning the Underlying Funds is set
forth below under the caption "The Underlying Funds."
In addition to Prime Obligations Fund, the Funds also may hold cash or
invest in cash items of the kinds described under "Special Investment
Methods -- Cash Items." Under normal circumstances, the aggregate
investments of the Funds in Prime Obligations Fund and such cash and cash
items will not exceed the maximum percentages set forth in the table above
for Prime Obligations Fund. However, for temporary defensive purposes, the
Funds may, without limitation, hold shares of Prime Obligations Fund and
such cash and cash items.
The Funds are permitted to invest in futures contracts and options on
futures 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. For information about these investment methods, restrictions on
their use, and certain associated risks, see "Special Investment Methods --
Futures and Options on Futures."
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RISKS TO CONSIDER
An investment in any of the Funds involves certain risks. These include the
following:
<PAGE>
ACTIVE MANAGEMENT. All of the Funds are actively managed. The performance of
the Funds therefore will reflect in part the ability of the Advisor to make
asset allocation and other investment decisions which are suited to
achieving the Funds' investment objectives. Due to their active management,
the Funds could underperform other mutual funds with similar investment
objectives.
ADDITIONAL EXPENSES. Investing in the Underlying Funds through the Funds
involves certain additional expenses that would not be present in a direct
investment in the Underlying Funds. See "Fees and Expenses -- Information
Concerning Fees and Expenses."
YEAR 2000. Like other mutual funds, financial and business organizations,
the Funds and Underlying Funds could be adversely affected if the computer
systems used by the Advisor, the Administrator and other service providers
and entities with computer systems that are linked to Fund or Underlying
Fund records do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 issue." The Funds and Underlying Funds have undertaken a Year 2000
program that is believed by the Advisor to be reasonably designed to assess
and monitor the steps being taken by the Funds' and Underlying Funds'
service providers to address the Year 2000 issue with respect to the
computer systems they use. However, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds or the
Underlying Funds.
RISKS ASSOCIATED WITH THE UNDERLYING FUNDS. The risks associated with the
Underlying Funds are discussed in greater detail under "The Underlying
Funds." These risks include, among others:
* The Underlying Funds are actively managed, and therefore may
underperform other mutual funds with similar investment objectives.
* Each of the Underlying Funds is subject to the risk of generally adverse
markets. In general, the market prices of equity securities frequently
are subject to greater volatility than the prices of fixed income
securities. Therefore, it may be expected that the net asset values of
Funds which are permitted to invest higher proportions of their assets
in the Equity Funds may be more volatile than Funds which are limited to
lower proportions.
* With respect to the Equity Funds, (i) certain of these funds are subject
to risks associated with investing in small-capitalization companies;
(ii) Real Estate Securities Fund is subject to risks associated with
concentrating its investments in a single or related economic sectors;
(iii) Real Estate Securities Fund is subject to risks associated with
direct investments in real estate investment trusts; (iv) International
Fund is subject to risks associated with investing in foreign securities
and to currency risk; (v) Emerging Markets Fund is subject to the risks
associated with investing in securities issued by issuers in emerging
market countries; (vi) Equity Income Fund may invest a significant
portion of its assets in less than investment grade convertible debt
obligations; (vii) certain of the other Equity Funds may invest
specified portions of their assets in securities of foreign issuers
which are listed on a United States stock exchange or are represented by
American Depositary Receipts; and (viii) certain Underlying Funds may
engage (but not for speculative purposes) in options and futures
transactions.
* With respect to the Fixed Income Funds, these Funds (i) are subject to
interest rate risk (the risk that increases in market interest rates
will cause declines in the value of the debt securities held by the
fund), credit risk (the risk that the issuers of debt securities held by
the fund default in making required payments), and call or prepayment
risk (the risk that a borrower may exercise the right to prepay a debt
obligation before its stated maturity, requiring the fund to reinvest
the prepayment at a lower interest rate); (ii) may invest in
mortgage-backed securities which are subject to certain additional
risks;
<PAGE>
and (iii) may, in order to attempt to reduce risk, invest in exchange
traded put and call option on interest rate futures contracts and on
interest rate indices. Strategic Income Fund may invest a significant
portion of its assets in securities rated less than investment grade
("high yield" securities or "junk bonds"), which generally have more
volatile prices and carry more risk to principal than investment grade
securities. In addition, to the limited extent to which the Equity Funds
may invest in fixed-rate debt securities, they also are subject to
interest rate risk, credit risk and call risk.
POSSIBLE CONFLICTS OF INTEREST. As discussed below under "-- Possible
Conflicts of Interest and Receipt of Securities," it is possible that
situations could arise in which the interests of the Funds diverge from
those of the Underlying Funds.
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PORTFOLIO TURNOVER
Each Fund's portfolio turnover rate is not expected to exceed 25% annually.
It is expected that the Advisor will make asset re-allocation decisions for
the Funds on a monthly basis. However, the Advisor may re-allocate assets
more frequently if it determines that market conditions so warrant. The
Funds will purchase and sell shares of the Underlying Funds and other
permitted investments (i) to maintain or modify the allocation of the Funds'
assets in the Underlying Funds within the percentage ranges set forth above
under "-- Investment Policies;" (ii) to accommodate purchases and
redemptions of the Funds' shares; and (iii) in response to market or other
economic conditions. It should be noted that the portfolio turnover rates of
the Underlying Funds can be higher than the Funds' portfolio turnover rates.
High portfolio turnover rates (100% or more) in the Underlying Funds
generally would result in higher transaction costs and could result in
additional tax consequences to the Underlying Funds' shareholders, including
the Funds.
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INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are
set forth in full in the Funds' Statement of Additional Information. The
fundamental restrictions include the following:
* None of the Funds will 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.
* None of the Funds will 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. If a Fund engages in borrowing, its share price may
be subject to greater fluctuation, and the interest expense associated
with the borrowing may reduce the Fund's net income.
* None of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not to exceed 15% of the value of its total assets
to secure temporary or emergency borrowing.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary to for the clearance
of transactions.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
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POSSIBLE CONFLICTS OF INTEREST AND RECEIPT OF SECURITIES
The officers and directors of FASF also serve as officers and directors of
FAIF and FAF. In addition, the Advisor to the Funds also serves as
investment
<PAGE>
advisor to the Underlying Funds. It is possible that situations could arise
in which the interests of the Funds diverge from those of the Underlying
Funds, so that these officers and directors and the Advisor could be subject
to conflicts of interest. For example, the Advisor might determine that a
particular Fund should reduce its allocation of assets to a particular
Underlying Fund, thus requiring it to redeem shares of such Underlying Fund,
at a time when it is not in the best interests of such Underlying Fund to
sell portfolio securities in order to meet such a redemption request. Other
types of conflicts of interest between the Funds and the Underlying Funds
may arise as well. The Advisor intends to monitor the operations of the
Funds and of the Underlying Funds for potential conflicts of interest and to
take and recommend to the directors such steps as it believes are necessary
in order to avoid or minimize, to the extent possible, adverse consequences
to the Funds or the Underlying Funds from such conflicts of interest.
In order to resolve some types of conflicts of interest, the Advisor might
determine that an Underlying Fund should meet a redemption request by a Fund
by distributing securities from its portfolio to the Fund rather than by
paying cash to the Fund. For example, where an Underlying Fund would incur
sizeable brokerage commissions in disposing of portfolio securities in order
to pay a Fund's redemption request in cash, the Underlying Fund might
instead distribute portfolio securities to the Fund so that the Fund alone,
and not the Underlying Fund and its other shareholders, would bear the
brokerage commissions associated with disposing of such securities. If a
Fund receives securities as a result of such in-kind distributions, it may
hold such securities until the Advisor determines that it is appropriate to
dispose of them, and the receipt and holding of such securities will not be
deemed to violate the Fund's investment policies.
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EXEMPTIVE ORDER
Each Fund seeks to achieve its investment objectives by investing in the
Underlying Funds within the percentage ranges set forth above under "--
Investment Policies." The Funds operate under an exemptive order from the
Securities and Exchange Commission permitting them to invest up to 100% of
their assets in shares of other mutual funds which are part of the "same
group of investment companies" as the Funds within the meaning of Rule 11a-3
under the 1940 Act, subject to certain conditions.
THE UNDERLYING FUNDS
This section sets forth information concerning the investment objectives,
policies, and restrictions of the Underlying Funds. There is no assurance
that any of the Underlying Funds' investment objectives will be achieved.
Each of the Underlying Funds is a separate series of FAIF except for Prime
Obligations Fund, which is a separate series of FAF. The Advisor also acts
as investment advisor for each of the Underlying Funds. The Advisor has
retained a sub-advisor or sub-advisors with respect to International Fund,
Emerging Markets Fund and Strategic Income Fund. See "Management."
Additional information concerning the Underlying Funds is contained in their
Prospectuses and Statements of Additional Information, copies of which can
be obtained by writing SEI Investments Distribution Co., Oaks, Pennsylvania
19456, or by calling (888) 997-8728.
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GENERAL
Except with respect to Prime Obligations Fund, the Underlying Funds'
investment objectives are not fundamental and therefore may be changed
without a vote of shareholders. Each of the Underlying Funds except Real
Estate Securities Fund is a diversified investment company, as defined in
the 1940 Act. Real Estate Securities Fund is a non-diversified company under
the 1940 Act.
If a percentage limitation on investments by an Underlying Fund stated
below is adhered to at the
<PAGE>
time of an investment, a later increase or decrease in percentage resulting
from changes in asset values will not be deemed to violate the limitation
except in the case of the limitations on illiquid investments and borrowing.
Similarly, if an Underlying Fund is required or permitted to invest a stated
percentage of its assets in companies with no more or no less than a stated
market capitalization, deviations from the stated percentages which result
from changes in companies' market capitalizations after the Underlying Fund
purchases their shares will not be deemed to violate the limitation. An
Underlying Fund which is limited to investing in securities with specified
ratings is not required to sell a security if its rating is reduced or
discontinued after purchase, but the Underlying Fund may consider doing so.
However, except in the case of Equity Income Fund, in no event will more
than 5% of any Underlying Fund's net assets be invested in non-investment
grade securities. Descriptions of the rating categories of Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's") and Moody's Investors Service, Inc. ("Moody's") are contained in
the Statement of Additional Information.
When the term "equity securities" is used in the following sections, it
refers to common stock and securities which are convertible into or
exchangeable for, or which carry warrants or other rights to acquire, common
stock.
In addition to the investment policies described under the specific Equity
Funds' captions below, the Equity Funds also are subject to the investment
policies described below under the caption "-- Policies Common to Underlying
Equity Funds." Certain fundamental investment restrictions of the Underlying
Funds are described under "Special Investment Methods -- Investment
Restrictions of the Underlying Funds."
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REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing
primarily in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities
Fund invests at least 65% of its total assets in income producing equity
securities of publicly traded companies principally engaged in the real
estate industry. For this purpose, a company is deemed to be "principally
engaged" in the real estate industry if (i) it derives at least 50% of its
revenues or profits from the ownership, construction, management, financing
or sale of residential, commercial or industrial real estate or (ii) has at
least 50% of the fair market value of its assets invested in such real
estate. Real Estate Securities Fund seeks to invest in equity securities
that provide a dividend yield that exceeds the composite dividend yield of
the securities included in the S&P 500.
A majority of Real Estate Securities Fund's total assets will be invested in
securities of real estate investment trusts ("REITs"). REITs are publicly
traded corporations or trusts that specialize in acquiring, holding, and
managing residential, commercial or industrial real estate. A REIT is not
taxed at the entity level on income distributed to its shareholders or
unitholders if it distributes to shareholders or unitholders at least 95% of
its taxable income for each taxable year and complies with regulatory
requirements relating to its organization, ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and
Hybrid REITs. An Equity REIT invests the majority of its assets directly in
real property and derives its income primarily from rents and from capital
gains on real estate appreciation which are realized through property sales.
A Mortgage REIT invests the majority of its assets in real estate mortgage
loans and derives its income primarily from interest payments. A Hybrid REIT
combines the characteristics of an Equity REIT and a Mortgage REIT. Although
Real Estate Securities Fund can invest in all three kinds of REITs, its
emphasis is expected to be on investments in Equity REITs.
<PAGE>
Real Estate Securities Fund also may invest up to 35% of its total assets in
fixed income securities of the kinds described under "Special Investment
Methods -- Fixed Income Securities."
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry.
The real estate industry has been subject to substantial fluctuations and
declines on a local, regional and national basis in the past and may
continue to be in the future. Real property values and incomes from real
property may decline due to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
regulatory limitations on rents, changes in neighborhoods and in
demographics, increases in market interest rates, or other factors. Factors
such as these may adversely affect companies which own and operate real
estate directly, companies which lend to such companies, and companies which
service the real estate industry. Although Real Estate Securities Fund will
operate as a non-diversified investment company under the 1940 Act, it
intends to conduct its operations so as to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code").
Because Real Estate Securities Fund may invest a substantial portion of its
assets in REITs, it also is subject to risks associated with direct
investments in REITs. Equity REITs will be affected by changes in the values
of and incomes from the properties they own, while Mortgage REITs may be
affected by the credit quality of the mortgage loans they hold. In addition,
REITs are dependent on specialized management skills and on their ability to
generate cash flow for operating purposes and to make distributions to
shareholders or unitholders. REITs may have limited diversification and are
subject to risks associated with obtaining financing for real property, as
well as to the risk of self-liquidation. REITs also can be adversely
affected by their failure to qualify for tax-free pass-through treatment of
their income under the Code, or their failure to maintain an exemption from
registration under the 1940 Act. By investing in REITs indirectly through
Real Estate Securities Fund, a shareholder of Real Estate Securities Fund
bears not only a proportionate share of the expenses of Real Estate
Securities Fund, but also may indirectly bear similar expenses of some of
the REITs in which it invests.
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EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of
capital and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund
invests at least 65% of its total assets in equity securities of issuers
believed by its advisor to be characterized by sound management, the ability
to finance expected growth and the ability to pay above average dividends.
Equity Income Fund invests in equity securities that have relatively high
dividend yields and which, in the advisor's opinion, will result in a
relatively stable fund dividend with a growth rate sufficient to maintain
the purchasing power of the income stream. Although the advisor anticipates
that higher yielding equity securities will generally represent the core
holdings of Equity Income Fund, Equity Income Fund may invest in lower
yielding but higher growth equity securities to the extent that the advisor
believes such investments are appropriate to achieve portfolio balance. All
securities held by Equity Income Fund will provide current income consistent
with its investment objective.
The "equity securities" in which Equity Income Fund may invest include
corporate debt obligations which are convertible into common stock. These
convertible debt obligations may include obligations rated at the time of
purchase as low as CCC by Standard & Poor's or Caa by Moody's, or which have
been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the advisor. Debt obligations rated less than BBB by Standard &
Poor's or Baa
<PAGE>
by Moody's are considered to be less than "investment grade" and are
sometimes referred to as "junk bonds." Obligations rated CCC by Standard &
Poor's or Caa by Moody's are considered to be of poor standing and are
predominantly speculative. Descriptions of Standard & Poor's and Moody's
rating categories are contained in the Statement of Additional Information.
If the rating of an obligation is reduced below the categories set forth
above after purchase or is discontinued, Equity Income Fund is not required
to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance Equity Income Fund's objective of long-term growth of
capital through the "upside" potential of the obligations' conversion
features and to advance Equity Income Fund's objective of income through
receipt of interest payable on the obligations. Equity Income Fund will not
invest more than 25% of its total assets in convertible debt obligations
which are rated less than investment grade or which are of comparable
quality in the judgment of the advisor. At September 30, 1997, the following
percentages of Equity Income Fund's total assets were invested in
convertible and nonconvertible debt obligations with the indicated Standard
& Poor's ratings or their equivalents: AAA, 0%; AA, 0%; A, 0%; BBB, 1%; BB,
0%; B, 1%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income
and principal due to default by the issuer than are higher-rated
obligations. The value of these obligations tends to reflect short-term
corporate, economic, interest rate and market developments and investor
perceptions of the issuer's credit quality to a greater extent than
investment grade obligations. In addition, since the market for these
obligations is relatively new and does not have as many participants as the
market for higher-rated obligations, it may be more difficult to dispose of
or to determine the value of these obligations. In the case of a convertible
debt obligation, these risks may be present in a greater degree where the
principal amount of the obligation is greater than the current market value
of the common stock into which it is convertible.
Equity Income Fund also may invest up to 35% of its total assets in fixed
income securities of the kinds described under "Special Investment Methods
-- Fixed Income Securities."
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LARGE CAP VALUE FUND
OBJECTIVES. Large Cap Value Fund (formerly known as Stock Fund) has a
primary objective of capital appreciation. A secondary objective of Large
Cap Value Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Large Cap Value Fund
invests at least 65% of its total assets in common stocks diversified among
a broad range of industries and among companies that have a market
capitalization of at least $1 billion at the time of purchase. In selecting
equity securities, the Fund's advisor employs a value-based selection
discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the advisor will consider factors
such as ratios of market price to earnings, market price to book value,
market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
Large 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
less than $1 billion and in fixed income securities of the kinds described
under "Special Investment Methods -- Fixed Income Securities."
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LARGE CAP GROWTH FUND
OBJECTIVES. Large Cap Growth Fund (formerly known as Diversified Growth
Fund) has a primary objective of long-term growth of capital. A secondary
objective of Large Cap Growth Fund is to provide current income.
<PAGE>
INVESTMENT POLICIES. Under normal market conditions, Large Cap Growth Fund
invests at least 65% of its total assets in equity securities of companies
with market capitalizations of at least $1 billion at the time of purchase
that, in the Fund's advisor's judgment, exhibit a combination of above
average growth in revenue and earnings, strong management and sound and
improving financial condition.
Large Cap Growth Fund also may invest up to 35% of its total assets in fixed
income securities of the kinds described under "Special Investment Methods
-- Fixed Income Securities."
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MID CAP VALUE FUND
OBJECTIVE. Mid Cap Value Fund (formerly known as Special Equity Fund) has
an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Value Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies. For these purposes, mid-capitalization
companies are deemed those with market capitalizations from $1 billion to $5
billion at the time of purchase. In selecting equity securities, the Fund's
advisor employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the
same industry or market at the time of purchase. In assessing relative
value, the Advisor will consider factors such as ratios of market price to
earnings, market price to book value, market price to assets, estimated
earnings growth rate, cash flow and liquidation value.
Mid Cap Value Fund also may invest up to 35% of its total assets in fixed
income securities of the kinds described under "Special Investment Methods
-- Fixed Income Securities."
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SMALL CAP GROWTH FUND
OBJECTIVE. Small Cap Growth Fund (formerly known as Emerging Growth Fund)
has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Small Cap Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in its advisor's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market capitalizations
of less than $1 billion at the time of purchase. Companies that participate
in sectors that are identified by the Fund's advisor as having long-term
growth potential generally are expected to make up a substantial portion of
Small Cap Growth Fund's holdings. These companies often have established a
market niche or have developed unique products or technologies that are
expected by the Fund's advisor to produce superior growth in revenues and
earnings.
Small Cap Growth 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."
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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 advisor employs a value-based selection discipline, investing
in equity securities it believes are undervalued relative to other
securities in the same market or industry at the time of purchase. In
assessing relative value, Small Cap Value Fund's advisor will consider such
factors as ratios of market price to earnings, market price to book value,
and market price to assets, estimated earnings growth rate, cash flow and
liquidation value.
<PAGE>
Small Cap Value 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."
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INTERNATIONAL FUND
OBJECTIVE. International Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in markets other than the United
States. Generally these securities are issued by companies (i) domiciled in
countries other than the United States or (ii) that derive at least 50% of
either their revenues or their pre-tax income from activities outside of the
United States. The securities in which International Fund invests include
common and preferred stock, securities (bonds and preferred stock)
convertible into common stock, warrants and securities representing
underlying international securities such as American Depositary Receipts and
European Depositary Receipts. International Fund also may hold securities of
other investment companies (which investments are also subject to the
advisory fee) and depositary or custodial receipts representing beneficial
interests in any of the foregoing securities.
International Fund may invest in securities of issuers in, but not limited
to, Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China,
Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece,
Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea,
Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway,
Pakistan, Peru, the Philippines, Poland, Portugal, Singapore, South Africa,
Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United
Kingdom and Venezuela. Normally, International Fund will invest at least 65%
of its total assets in securities traded in at least three foreign
countries, including the countries listed above. It is possible, although
not currently anticipated, that up to 35% of International Fund's assets
could be invested in United States companies.
In investing International Fund's assets, the Fund's sub-advisor expects to
place primary emphasis on country selection, followed by selection of
industries or sectors within or across countries and by selection of
individual stocks corresponding to the industries or sectors selected.
Investments are expected to be made primarily in developed markets and
larger capitalization companies. However, International Fund also may invest
in emerging markets where smaller capitalization companies are the norm.
In addition, International Fund may (i) enter into repurchase agreements;
(ii) in order to attempt to reduce risk, purchase put and call options on
equity securities and on stock indices; (iii) write covered call options
covering up to 50% of the equity securities owned by International Fund and
write call options on stock indices related to such equity securities; (iv)
purchase securities on a when-issued or delayed delivery basis; (v) engage
in the lending of portfolio securities; (vi) engage in foreign currency
transactions; (vii) in order to attempt to reduce risk, purchase put and
call options on foreign currencies; (viii) write covered call options on
foreign currencies owned by International Fund; and (ix) enter into
contracts for the future purchase or delivery of securities, foreign
currencies, and indices, purchase or sell options on any such futures
contracts and engage in related closing transactions. For information about
these investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."
Under normal market conditions, it is expected that International Fund will
be fully invested in equity securities and related hedging instruments
(except for short-term investments of cash for liquidity purposes and
pending investment). However, for temporary defensive purposes,
<PAGE>
International Fund may, without limitation, hold cash or invest in cash
items of the kinds described under "Special Investment Methods -- Cash
Items." The Fund also may invest not more than 35% of its total assets in
cash and cash items in order to utilize assets awaiting normal investment.
International Fund is subject to special risks associated with investing in
foreign securities and to declines in net asset value resulting from changes
in exchange rates between the United States dollar and foreign currencies.
These risks are discussed under "Special Investment Methods -- Foreign
Securities" and "-- Foreign Currency Transactions" elsewhere here. Because
of the special risks associated with foreign investing and the Fund's
sub-advisor's ability to invest substantial portions of International Fund's
assets in a small number of countries, International Fund may be subject to
greater volatility than most mutual funds which invest principally in
domestic securities.
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MID CAP GROWTH FUND
OBJECTIVE. Mid Cap Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Mid Cap Growth Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies that, in the opinion of the Fund's advisor,
exhibit outstanding potential for superior growth based on a combination of
factors such as above average growth in revenue and earnings, strong
management and sound and improving financial condition. For these purposes,
mid-capitalization growth companies are deemed those with market
capitalizations from $1 billion to $5 billion at the time of purchase.
Mid Cap Growth Fund also may invest up to 35% of its total assets in the
aggregate in equity securities of issuers with a market capitalization of
less than $1 billion or more than $5 billion and in fixed income securities
of the kinds described under "Special Investment Methods -- Fixed Income
Securities."
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EMERGING MARKETS FUND
OBJECTIVE. Emerging Markets Fund has an objective of long-term growth of
capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Markets Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in emerging markets. A country
will be considered to have an "emerging market" if it has a relatively low
gross national product per capita compared to the world's major economies
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Finance Corporation), those with low- to middle income
economies (according to the World Bank), and those listed in World bank
publications as "developing."
The securities in which Emerging Markets Fund invests include common and
preferred stock, securities (bonds and preferred stock) convertible into
common stock, warrants and securities representing underlying international
securities such as American Depositary Receipts and European Depositary
Receipts. Emerging Markets Fund may also hold securities of other investment
companies (which investments are also subject to the advisory fee) and
depositary or custodial receipts representing beneficial interests in any of
the foregoing securities. Normally, Emerging Markets Fund will invest at
least 65% of its total assets in securities traded in at least six foreign
countries although it may invest all of its assets in a single country. At
the present time, Emerging Markets Fund has no intention of investing all of
its assets in a single country.
In investing Emerging Markets Fund's assets, its sub-advisor expects to
place primary emphasis on country selection, followed by selection of
industries or sectors within or across countries and by selection of
individual stocks corresponding to the industries or sectors selected.
In addition, Emerging Markets Fund may (i) enter into repurchase agreements;
(ii) in order to reduce
<PAGE>
risk, purchase put and call options on equity securities and on stock
indices; (iii) write covered call options covering up to 50% of the equity
securities owned by the Fund and write call options on stock indices related
to such equity securities; (iv) purchase securities on a when-issued or
delayed delivery basis; (v) engage in the lending of portfolio securities;
(vi) engage in foreign currency transactions; (vii) in order to attempt to
reduce risk, purchase put and call options on foreign currencies; (viii)
write covered call options on foreign currencies owned by Emerging Markets
Fund; and (ix) enter into contracts for the future purchase or delivery of
securities, foreign currencies, and indices, purchase or sell options on any
such futures contracts and engage in related closing purchase transactions.
For information about these investment methods, restrictions on their use,
and certain associated risks, see the related headings under "Special
Investment Methods."
Emerging Markets Fund is subject to special risks associated with investing
in foreign securities and to declines in net asset value resulting from
changes in exchange rates between the United States dollar and foreign
currencies. In addition, Emerging Markets Fund is subject to additional
risks associated with investing in issuers located in emerging market
countries. These risks are discussed under "Special Investment Methods --
Foreign Securities" and "-- Foreign Currency Transactions" elsewhere herein.
Because of the special risks associated with foreign investing and the
Fund's sub-advisor's ability to invest substantial portions of Emerging
Markets Fund's assets in a small number of countries, Emerging Markets Fund
may be subject to greater volatility than most mutual funds which invest
principally in domestic securities.
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POLICIES COMMON TO UNDERLYING EQUITY FUNDS
Subject to the limitations stated under their respective captions above,
each of Real Estate Securities Fund, Equity Income Fund, Large Cap Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund and Mid Cap Growth Fund 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.
For information about these kinds of investments and certain associated
risks, see "Special Investment Methods -- Foreign Securities."
Each of Real Estate Securities Fund, Equity Income Fund, Large Cap Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund and Mid Cap Growth Fund may (i) enter into repurchase
agreements; (ii) in order to attempt to reduce risk, purchase put and call
options on equity securities and on stock indices; (iii) write covered call
options covering up to 25% of the equity securities owned by such Underlying
Fund and write call options on stock indices related to such securities;
(iv) purchase securities on a when-issued or delayed delivery basis; and (v)
engage in the lending of portfolio securities. For information about these
investment methods, restrictions on their use, and certain associated risks,
see the related headings under "Special Investment Methods." International
Fund and Emerging Markets Fund may engage in these and certain additional
activities to the extent described under their captions above.
Each of Real Estate Securities Fund, Equity Income Fund, Large Cap Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, Mid Cap Growth Fund and Emerging Markets Fund may, for
temporary defensive purposes, without limitation hold cash or invest in cash
items of the kinds described under "Special Investment Methods -- Cash
Items." Each such Underlying Fund also may invest not more than 35% of its
total assets in cash and cash items in order to utilize assets awaiting
normal investment.
<PAGE>
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FIXED INCOME FUND
OBJECTIVE. Fixed Income Fund has an objective of providing a high level of
current income consistent with limited risk to capital.
INVESTMENT POLICIES. Fixed Income Fund invests in investment grade debt
securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-backed and asset-backed
securities rated at least A by Standard & Poor's or Moody's or which have
been assigned an equivalent rating by another nationally recognized
statistical rating organization. Under normal market conditions, the
weighted average maturity of the securities held by Fixed Income Fund will
not exceed 15 years.
Fixed Income Fund's permitted investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities (including
zero coupon securities); domestic issues of corporate debt obligations
having floating or fixed rates of interest and rated at least BBB by
Standard & Poor's or Baa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the
advisor; other fixed income securities, including mortgage-backed
securities, which are rated in one of the four highest categories by a
nationally recognized statistical rating organization or which are of
comparable quality in the judgment of the advisor; and commercial paper
which is rated A-1 by Standard & Poor's or P-1 by Moody's or which has been
assigned an equivalent rating by another nationally recognized statistical
rating organization. Unrated securities deemed to be of comparable quality
to rated securities as set forth above will not exceed 25% of Fixed Income
Fund's total assets. At least 65% of the total assets of Fixed Income Fund
will be invested in fixed rate obligations.
Subject to the foregoing limitations, Fixed Income Fund may invest in the
following kinds of securities, as described under the related headings under
"Special Investment Methods:" (i) mortgage-backed securities (provided that
Fixed Income Fund will not invest more than 10% of its total assets in the
aggregate in interest-only, principal-only or inverse floating rate
mortgage-backed securities); (ii) asset-backed securities; and (iii) bank
instruments.
In addition, Fixed Income Fund may (i) invest up to 15% of its total assets
in foreign securities payable in United States dollars; (ii) enter into
repurchase agreements; (iii) in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts and
on interest rate indices; (iv) in order to attempt to reduce risk, invest in
exchange traded interest rate futures contracts; (v) purchase securities on
a when-issued or delayed delivery basis; (vi) invest up to 25% of its total
assets in mortgage dollar roll transactions; and (vii) engage in the lending
of portfolio securities. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
Although Fixed Income Fund will not make direct purchases of common or
preferred stocks or rights to acquire common or preferred stocks, Fixed
Income Fund may invest in debt securities which are convertible into or
exchangeable for, or which carry warrants or other rights to acquire, such
stocks. Equity interests acquired through conversion, exchange or exercise
of rights to acquire stock will be disposed of by Fixed Income Fund as soon
as practicable in an orderly manner.
For temporary defensive purposes, Fixed Income Fund may without limitation
hold cash or invest in cash items. Fixed Income Fund also may invest not
more than 35% of its total assets in cash and cash items in order to utilize
assets awaiting normal investment. Cash items may include short-term
obligations such as rated commercial paper and variable amount master demand
notes; time and savings deposits (including certificates of deposit);
bankers' acceptances; obligations of the United States Government or its
agencies or instrumentalities; and repurchase agreements collateralized
<PAGE>
by eligible investments. Fixed Income Fund also may invest in securities of
other mutual funds which invest primarily in debt obligations with remaining
maturities of 13 months or less.
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STRATEGIC INCOME FUND
OBJECTIVE. Strategic Income Fund has an investment objective of providing
a high level of current income.
INVESTMENT POLICIES. Under normal market conditions, Strategic Income Fund
invests at least 65% of its total assets in a combination of (i) U.S.
government securities and investment grade domestic corporate debt
obligations; (ii) high yield (i.e. non-investment grade) domestic and U.S.
dollar denominated foreign corporate debt obligations; and (iii) investment
grade and high yield foreign government and foreign corporate debt
obligations. Under normal market conditions, Strategic Income Fund's assets
will be invested in each of these three sectors, with no more than 50% of
its total assets invested in any one sector. However, Strategic Income Fund
may from time to time invest up to 100% of its total assets in any one
sector, if, in the judgment of its advisor, Strategic Income Fund has the
opportunity to seek its investment objective without undue risk to
principal.
Strategic Income Fund's permitted investments include direct obligations of
the U.S. Treasury; notes, bonds and discount notes of United States
government agencies and instrumentalities; debt obligations issued by
foreign governments; and domestic or foreign issues of corporate debt
obligations having floating or fixed rates of interest (including
participation interests). Such corporate debt obligations may include
obligations rated BB or lower by Standard & Poor's or Ba or lower by Moody's
(such as obligations that are currently in default), given an equivalent
rating by a nationally recognized statistical rating organization (commonly
referred to as "junk bonds") or unrated but deemed of comparable quality by
Strategic Income Fund's sub-advisor. There are no minimum rating
requirements for these investments by Strategic Income Fund. Strategic
Income Fund may also invest in mortgage-backed securities (government and
non-government), asset-backed securities, and zero coupon, pay-in-kind and
delayed interest securities issued by corporations. In addition, Strategic
Income Fund may invest in preferred stock and in equity securities,
including common stock, convertible securities and warrants issued by
corporations in any industry which may be denominated in U.S. dollars or
foreign currencies. Strategic Income Fund's investments may include U.S.
dollar-denominated debt obligations known as "Brady Bonds," which are issued
for the exchange of existing commercial bank loans to foreign entities for
new obligations that are generally collateralized by zero coupon Treasury
securities having the same maturity. No more than 25% of Strategic Income
Fund's total assets, at the time of purchase, may be invested in government
securities of any one foreign country.
The securities that Strategic Income Fund may purchase may be issued by
government agencies or instrumentalities or corporate issuers located in
emerging market countries. For a description of emerging market countries
and the risks associated with investing in emerging market countries, see
the related heading under "Special Investment Methods."
For temporary defensive purposes, Strategic Income Fund may without
limitation hold cash or invest in cash items of the kinds described in
"Special Investment Methods -- Bank Instruments."
In addition, Strategic Income Fund may (i) enter into repurchase agreements;
(ii) in order to attempt to reduce risk, purchase put and call options on
equity securities, foreign government debt obligations, stock indices and
interest rate indices; (iii) write covered call options on equity securities
covering up to 25% of its net assets; (iv) purchase securities on a
when-issued or delayed delivery basis; (v) engage in the lending of
portfolio securities; (vi) engage in foreign currency transactions; (vii) in
order to attempt to reduce
<PAGE>
risk, purchase put and call options on foreign currencies owned by Strategic
Income Fund; (viii) write covered call options on foreign currencies owned
by Strategic Income Fund; (ix) engage in mortgage dollar roll transactions;
(x) invest up to 10% of its total assets in the aggregate in interest only,
principal only or inverse floating rate mortgage-backed securities; and (xi)
enter into contracts for the future purchase or delivery of securities,
foreign currencies and indices, purchase or sell options on any such futures
contracts and engage in related closing purchase transactions. For
information about these investment methods, restrictions on their use and
certain associated risks, see the related headings under "Special Investment
Methods."
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PRIME OBLIGATIONS FUND
OBJECTIVE. Prime Obligations Fund seeks to achieve maximum current income
to the extent consistent with the preservation of capital and the
maintenance of liquidity.
INVESTMENT POLICIES. Prime Obligations Fund seeks to maintain a constant
dollar price of $1.00 per share and holds itself out as a "money market
fund." As such, Prime Obligations Fund is subject to the provisions of Rule
2a-7 under the 1940 Act, which require, among other things, that the fund
invest exclusively in securities that mature within 397 days from the date
of purchase as determined pursuant to Rule 2a-7, that it maintain an average
weighted maturity of not more than 90 days, and that it invest only in
United States dollar-- denominated investments that meet specified credit
quality standards. There is no assurance that Prime Obligations Fund will be
able to maintain a constant dollar price of $1.00 per share.
In seeking to achieve its objective, Prime Obligations Fund invests in money
market instruments, including marketable securities issued or guaranteed by
the United States Government or its agencies or instrumentalities; United
States dollar-denominated obligations (including bankers' acceptances, time
deposits, and certificates of deposit, including variable rate certificates
of deposit) of banks (including commercial banks, savings banks, and savings
and loan associations) organized under the laws of the United States or any
state, foreign banks, United States branches of foreign banks, and foreign
branches of United States banks, if such banks have total assets of not less
than $500 million; and certain corporate and other obligations, including
high grade commercial paper, non-convertible corporate debt securities, and
loan participation interests with no more than 397 days remaining to
maturity as determined pursuant to Rule 2a-7. For more information on these
types of securities, see "Special Investment Methods" below. Under Rule
2a-7, securities which are subject to certain types of demand or put
features may be deemed to mature at the next demand or put date although
they have a longer stated maturity.
Prime Obligations Fund may also (i) engage in repurchase agreements with
respect to any of its portfolio securities, (ii) purchase credit enhancement
agreements to enhance the creditworthiness of its portfolio securities,
(iii) lend securities from its portfolio, or (iv) purchase the securities
described above on a when-issued or delayed delivery basis. See "Special
Investment Methods" below.
Prime Obligations Fund may invest (i) up to 25% of its total assets in
dollar-denominated obligations of United States branches of foreign banks
which are subject to the same regulation as United States banks, and (ii) up
to 25% of its total assets collectively in dollar-denominated obligations of
foreign branches of domestic banks, foreign banks, and foreign corporations.
Prime Obligations Fund may invest in United States dollar-denominated
obligations of foreign corporations if the obligations satisfy the same
quality standards set forth above for domestic corporations. See "Special
Investment Methods" for a discussion of the risks relating to investments in
such securities.
<PAGE>
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RISKS TO CONSIDER WITH RESPECT TO THE UNDERLYING FUNDS
An investment in the Underlying Funds involves certain risks in addition to
those noted above with respect to particular funds. These include the
following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally,
and of particular companies' equity securities, frequently are subject to
greater volatility than prices of fixed income securities. Market prices of
equity securities as a group have dropped dramatically in a short period of
time on several occasions in the past, and they may do so again in the
future. Each of the Equity Funds is subject to the risk of generally adverse
equity markets.
SMALL-CAPITALIZATION COMPANIES. Small Cap Growth Fund and Small Cap Value
Fund emphasize investments in companies with small market capitalizations,
and the remaining Equity Funds are permitted to invest in equity securities
of such companies. The equity securities of such companies frequently have
experienced greater price volatility in the past than those of
larger-capitalization companies, and they may be expected to do so in the
future. To the extent that the Equity Funds invest in small companies, they
are subject to this risk of greater volatility.
INTEREST RATE, CREDIT, AND CALL RISK. Fixed Income Fund and Strategic Income
Fund are subject to interest rate, credit, and call risk, as are the Equity
Funds to the extent that they are permitted to invest limited portions of
their assets in fixed-rate securities:
* INTEREST RATE RISK is the risk that the value of a fixed-rate debt
security will decline due to changes in market interest rates. In
general, when interest rates rise, the value of a fixed-rate debt
security declines. Conversely, when interest rates decline, the value of
a fixed-rate debt security generally increases. In general, the value of
fixed-rate debt securities with longer maturities is more sensitive to
changes in market interest rates than the value of such securities with
shorter maturities. Thus, the net asset value of a fund which invests in
securities with longer weighted average maturities, such as Fixed Income
Fund, should be expected to have greater volatility in periods of
changing market interest rates than that of a fund which invests in
securities with shorter weighted average maturities.
* CREDIT RISK is the risk that the issuer of a debt security will fail to
make payments on the security when due. Fixed Income Fund can invest in
debt securities rated as low as BBB by Standard & Poor's or Baa by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the fund's advisor. Although these
rating categories are investment grade, obligations with these ratings
are viewed as having speculative characteristics and carry a somewhat
higher risk of default than obligations rated in the higher investment
grade categories.
* CALL RISK is the risk that a corporate bond will be called for
redemption at the option of its issuer at a price specified in the
indenture or other investment pursuant to which it was issued. In
general, it is advantageous for an issuer to call its bonds if they can
be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. If a bond is called during
a period of declining interest rates, its holder probably will have to
reinvest the proceeds received by it at a lower interest rate than that
borne by the called bond, thus resulting in a decrease in income.
RISKS OF LOWER RATED DEBT SECURITIES. From time to time, a significant
portion of Strategic Income Fund's portfolio may consist primarily of
non-investment grade (i.e., rated Ba or lower by Moody's or BB or lower by
Standard & Poor's) corporate debt obligations, which are commonly referred
to as "junk bonds." In addition, Equity Income Fund may invest up to 25% of
its total assets in convertible debt obligations which are rated less than
investment grade or which are of comparable quality in the judgment of the
advisor.
<PAGE>
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments.
(For example, securities rated in the lowest category have been unable to
satisfy their obligations under the bond indenture.) These lower-rated bonds
may be more susceptible to real or perceived adverse economic conditions
than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading
market for lower-rated bonds may be less liquid than the market for
investment grade bonds. As a result of these factors, lower-rated securities
tend to have more price volatility and carry more risk to principal than
higher-rated securities.
ACTIVE MANAGEMENT. All of the Underlying Funds are actively managed by their
advisor or, in the case of International Fund, Emerging Markets Fund and
Strategic Income Fund, their sub-advisor or sub-advisors. Their performance
therefore will reflect in part the ability of the advisor and/or sub-advisor
to select securities which are suited to achieving their investment
objectives. Due to their active management, the Underlying Funds could
underperform other mutual funds with similar investment objectives or the
market generally.
FOREIGN SECURITIES. International Fund, Emerging Markets Fund and Strategic
Income Fund are subject to special risks associated with investing in
foreign securities and to declines in net asset value resulting from changes
in exchange rates between the United States dollar and foreign securities.
Emerging Markets Fund and Strategic Income Fund are also subject to risks
associated with investing in securities issued by issuers in emerging market
countries. These risks are discussed under "Special Investment Methods --
Foreign Securities" elsewhere herein. Because of the special risks
associated with foreign investing, such Funds may be subject to greater
volatility than most mutual funds which invest principally in domestic
securities.
OTHER. Investors also should review "Special Investment Methods" for
information concerning risks associated with certain investment techniques
which may be utilized by Underlying Funds.
MANAGEMENT
The Board of Directors of FASF has the primary responsibility for overseeing
the overall management and electing the officers of FASF. Subject to the
overall direction and supervision of the Board of Directors, the Advisor
acts as investment advisor for and manages the investment portfolios of
FASF.
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INVESTMENT ADVISOR TO THE FUNDS
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment advisor through its First
American Asset Management group. The Advisor has acted as an investment
advisor to FASF since its inception in 1996. The Advisor also has acted as
investment advisor to FAIF since 1987 and to FAF since 1982. As of September
30, 1997, the Advisor was managing accounts with an aggregate value of
approximately $55 billion, including mutual fund assets of approximately $20
billion. U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota
55402, is the holding company for the Advisor.
Each of the Funds has agreed to pay the Advisor monthly fees calculated on
an annual basis equal to 0.25% of its average daily net assets. The Advisor
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time. The Advisor also may
absorb or reimburse expenses of the Funds from time to time, in its
discretion, while retaining the ability to be reimbursed by the Funds for
such amounts prior to the end of the fiscal year. This practice would have
the effect of lowering a Fund's overall expense ratio and of increasing
yield to
<PAGE>
investors, or the converse, at the time such amounts are absorbed or
reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds believe that the Advisor is not
prohibited from performing the investment advisory services described above,
and that broker-dealers affiliated with the Advisor are not prohibited from
entering into a sales agreement with the Distributor as described herein. In
the event of changes in federal or state statutes or regulations or judicial
and administrative interpretations or decisions pertaining to permissible
activities of bank holding companies and their bank and nonbank
subsidiaries, the Advisor and affiliated broker-dealers might be prohibited
from continuing these arrangements. In that event, it is expected that the
Board of Directors would make other arrangements and that shareholders would
not suffer adverse financial consequences.
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PORTFOLIO MANAGEMENT OF THE FUNDS
Asset allocation decisions for the Funds are made by a committee comprised
of Mr. Bren, Mr. Cline, Mr. Doak, Mr. Dubiak, Mr. Jones, Mr. Murphy, Mr.
Rovner, Mr. Stanley, Mr. Ulrey, Mr. Steele, Mr. Green and Mr. Dow, whose
backgrounds are set forth below.
GERALD C. BREN joined the Advisor in 1972 as an investment analyst. Mr.
Bren received his master's degree in business administration from the
University of Chicago. He is a Chartered Financial Analyst. He also
participates in the management of certain of the Equity Funds.
DAVID CLINE is a member of the Advisor's asset allocation committee and is
responsible for quantitative analysis. He joined the Advisor in 1994 and has
nine years of investment industry experience. Prior to joining the Advisor,
he was a portfolio manager at Marquette Bank, N.A. Mr. Cline received his
bachelor's degree from Indiana University and his master's degree in
business administration from the University of Minnesota.
JAMES DOAK joined the Advisor in 1982 after serving for two years as vice
president of INA Capital Advisors and ten years as Vice President of
Loomis-Sayles & Co. He has managed assets for individual and institutional
clients, specializing in equity investment. Mr. Doak received his bachelor's
degree from Brown University and his master's degree in business
administration from the Wharton School of Business. He is a Chartered
Financial Analyst. He also participates in the management of certain of the
Equity Funds.
ALBIN S. DUBIAK began his investment career as a security trader with The
First National Bank of Chicago in 1963 before joining the Advisor as an
investment analyst in 1969. Mr. Dubiak received his bachelor's degree from
Indiana University and his master's degree in business administration from
the University of Arizona. He also participates in the management of certain
of the Equity Funds.
MARTIN L. JONES heads the Fixed Income Group of the Advisor and has over 20
years of investment experience. Formerly with Harris Trust & Savings Bank,
Dillon, Read & Co., and Loeb Rhoades & Co., Mr. Jones received his
bachelor's degree from Texas Tech University, his master's degree from
University of Texas, and his master's degree in business administration from
the University of Chicago. He also is portfolio manager of Fixed Income
Fund.
<PAGE>
JOHN M. MURPHY, JR. is Chief Investment Officer of the Advisor's First
American Asset Management group, having joined the Advisor in 1984. He has
more than 30 years in the investment management field and served with
Investment Advisers, Inc. and Blyth, Eastman, Dillon & Co. before joining
the Advisor. He received his bachelor's degree from Regis College. He also
participates in the management of certain of the Equity Funds.
JAMES S. ROVNER joined the Advisor in 1986 and has managed assets for
institutional and individual clients for over 15 years, specializing in
equity and balanced investment strategies. Mr. Rovner received his
bachelor's degree and his master's degree in business administration from
the University of Wisconsin. He is a Chartered Financial Analyst. He also
participates in the management of certain of the Equity Funds.
RICHARD W. STANLEY joined the Advisor in 1986 and has 39 years of
investment industry experience. Prior to joining the Advisor, Mr. Stanley
was with Heritage Investment Advisers and Smith Barney, Inc. Mr. Stanley
received his bachelor's degree from Dartmouth College and his master's
degree in business administration from Cornell University. He is a
Chartered Financial Analyst. He also participates in the management of
certain tax-exempt funds offered by FAIF.
JOSEPH M. ULREY III is a member of the Advisor's asset allocation committee.
He joined the Advisor in 1991 and has 16 years of investment industry
experience. Prior to joining the Advisor, Mr. Ulrey spent 10 years
overseeing various functions in the Treasury and Finance Divisions of U.S.
Bancorp. Mr. Ulrey received his bachelor's degree in mathematics/economics
from Macalester College and his master's degree in business administration
from the University of Chicago. He also participates in the management of
Prime Obligations Fund.
DAVID STEELE is a member of the Advisor's asset allocation committee. Mr.
Steele has over 18 years of investment industry experience. Prior to joining
the Advisor in 1998, Mr. Steele served as a senior vice president and
portfolio co-manager for Piper Capital Management Incorporated ("Piper
Capital"). Mr. Steele received his bachelor's degree in Business
Administration from the University of Washington and a master's degree in
Business Administration from the University of Southern California.
MARK M. GREEN is a member of the Advisor's asset allocation committee. He
joined the Advisor in 1996 and has over ten years of investment industry
experience. Prior to joining the Advisor, Mr. Green was a portfolio
manager at Wells Fargo Investment Management. Mr. Green received his
bachelor's degree and master's degree from San Francisco State University.
PAUL A. DOW is a member of the Advisor's asset allocation committee and a
Senior Managing Director of the Advisor. He joined the Advisor in 1998 and
has 24 years of investment industry experience. Prior to joining the
Advisor, Mr. Dow had been Chief Executive Officer of Piper Capital since
1997, prior to which he was a Senior Vice President, and Chief Investment
Officer of Piper Capital. He is a Chartered Financial Analyst. Mr. Dow
received his bachelor's degree in marketing from Southwest Missouri State
University.
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INVESTMENT ADVISOR AND SUB-ADVISORS TO THE UNDERLYING FUNDS
U.S. Bank, the advisor to the Funds, also acts as investment advisor to each
of the Underlying Funds through its First American Asset Management group.
Each of the Equity Funds other than International Fund and Emerging Markets
Fund has agreed to pay the Advisor monthly fees calculated on an annual
basis equal to 0.70% of its daily average assets. International Fund and
Emerging Markets Fund each pay the Advisor a monthly fee calculated on the
same basis equal to 1.25% of their average daily net assets, out of which
the Advisor pays that fund's sub-advisor's fees. Fixed Income Fund,
Strategic Income Fund and Prime Obligations Fund pay the Advisor monthly
fees calculated on the same basis equal to 0.70%, 0.70% and 0.40%,
respectively, of their
<PAGE>
average daily net assets. The Advisor may, at its option, waive any or all
of such fees, or reimburse expenses, with respect to any Underlying Fund
from time to time and may discontinue any such waiver or reimbursement at
any time.
Marvin & Palmer Associates, Inc. ("Marvin & Palmer"), 1201 North Market
Street, Suite 2300, Wilmington, Delaware 19801, is sub-advisor to
International Fund and Emerging Markets Fund under an agreement with the
Advisor. Marvin & Palmer is responsible for the investment and reinvestment
of International Fund's and Emerging Markets Fund's assets and the placement
of brokerage transactions in connection therewith. For its services to
International Fund, Marvin & Palmer is paid a monthly fee by the Advisor
calculated on an annual basis equal to 0.75% of the first $100 million of
the Fund's average daily net assets, 0.50% of the Fund's average daily net
assets in excess of $100 million up to $300 million, 0.45% of the Fund's
average daily net assets in excess of $300 million up to $500 million and
0.40% of the Fund's average daily net assets in excess of $500 million. For
its services to Emerging Markets Fund, Marvin & Palmer is paid a monthly fee
by the Advisor calculated on an annual basis equal to 0.85% of the first
$100 million of the Fund's average daily net assets, 0.60% of the Fund's
average daily net assets in excess of $100 million up to $300 million, 0.55%
of the Fund's average daily net assets in excess of $300 million up to $500
million and 0.50% of the Fund's average daily net assets in excess of $500
million.
Marvin & Palmer, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of Marvin & Palmer is owned by Mr.
Marvin, Mr. Palmer and several other holders. Marvin & Palmer is engaged in
the management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Marvin &
Palmer managed a total of $4.6 billion in investments for 53 institutional
investors.
Federated Investment Counseling, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779 and Federated Global Research Corp., 175 Water
Street, New York, New York 10038-4965, both subsidiaries of Federated
Investors, Inc., serve as sub-advisors to Strategic Income Fund under an
agreement with the Advisor. These sub-advisors are responsible for the
investment and reinvestment of a portion of Strategic Income Fund's assets
and the placement of brokerage transactions in connection therewith.
Federated Investment Counseling manages Strategic Income Fund's investments
in high yield (i.e., non-investment grade) domestic debt obligations and
U.S. dollar denominated foreign corporate debt obligations, Federated Global
Research Corp. manages Strategic Income Fund's foreign investments and
foreign currency transactions and the Advisor manages Strategic Income
Fund's investments in U.S. government securities and investment grade
domestic corporate debt obligations. For their services to Strategic Income
Fund, each such sub-advisor is paid a monthly fee by the Advisor calculated
on an annual basis equal to 0.20% of the first $25 million of Strategic
Income Fund's average daily net assets, 0.165% of Strategic Income Fund's
average daily net assets in excess of $25 million up to $50 million, 0.13%
of Strategic Income Fund's average daily net assets in excess of $50 million
up to $100 million and 0.105% of Strategic Income Fund's average daily net
assets in excess of $100 million.
Federated Investment Counseling, a Delaware business trust, and Federated
Global Research Corp., a Delaware corporation, are each registered
investment advisors under the Investment Advisers Act. These sub-advisors
and other subsidiaries of Federated Investors serve as investment advisors
to a number of investment companies and private accounts.
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CUSTODIAN
The Custodian of the Funds' assets is U.S. Bank National Association (the
"Custodian"), U.S. Bank Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of U.S. Bancorp.
<PAGE>
As compensation for its services to the Funds, the Custodian is paid monthly
fees equal to 0.03% of the average daily net assets of each Fund. In
addition, the Custodian is reimbursed for its out-of-pocket expenses
incurred while providing its services to the Funds. The Custodian also acts
as custodian of the Underlying Funds' assets and receives compensation for
such services.
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ADMINISTRATOR
The administrator for the Funds is SEI Investments Management Corporation,
Oaks, Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of
SEI Investments Company, provides the Funds with certain administrative
services necessary to operate the Funds. These services include shareholder
servicing and certain accounting and other services. The Administrator
provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, provided that to the extent that the
aggregate net assets of all First American Funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. From time to time, the
Administrator may voluntarily waive its fees or reimburse expenses with
respect to any of the Funds. Any such waivers or reimbursements may be made
at the Administrator's discretion and may be terminated at any time. The
Administrator also acts as administrator for the Underlying Funds and
receives compensation for such services. U.S. Bank assists the Administrator
and provides sub-administration services for the Funds. For these services,
the Administrator compensates the sub-administrator at an annual rate of up
to 0.05% of each Fund's average daily assets.
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TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent is
not affiliated with the Distributor, the Administrator or the Advisor. The
Transfer Agent also serves as transfer agent and dividend disbursing agent
for the Underlying Funds and receives compensation for such services.
Effective October 1, 1998, FASF has appointed U.S. Bank as servicing agent
to perform certain transfer agent and dividend disbursing agent services
with respect to the shares of the Funds held through accounts at U.S. Bank
and its affiliates. The Funds pay U.S. Bank an annual fee of $15 per account
for such services.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds. The Distributor is a Pennsylvania corporation and is the
principal distributor for a number of investment companies. The Distributor,
which is not affiliated with the Advisor, is a wholly-owned subsidiary of
SEI Investments Company and is located at Oaks, Pennsylvania 19456.
Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and
other industry professionals which enter into sales agreements with the
Distributor.
FASF has adopted and entered into a shareholder service plan and agreement
(the "Service Agreement") 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. In consideration of the services and facilities to be
provided by the Distributor or any service provider, each Fund will pay to
the Distributor a shareholder servicing fee at an annual rate of 0.25% of
the average net asset value of all shares of each Fund, which fee will be
computed daily and paid monthly. The shareholder servicing fee is intended
to compensate the Distributor for the provision of shareholder services and
may be used by the Distributor to provide compensation to institutions
through which shareholders hold their shares for ongoing service and/or
maintenance of shareholder
<PAGE>
accounts. Such shareholder services may include maintaining accounts
relating to beneficial owners that invest in shares; providing information
periodically to beneficial owners showing their positions in shares;
arranging for bank wires; responding to inquiries from beneficial owners
relating to the services performed by the Distributor or any service
provider; responding to inquiries from beneficial owners concerning their
investments in shares; forwarding shareholder communications from the
Funds (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to
beneficial owners; processing purchase, exchange and redemption requests
from beneficial owners and placing such orders with the Funds or their
service providers; assisting beneficial owners in changing dividend
options, account designations, and addresses; providing subaccounting with
respect to shares beneficially owned; processing dividend payments from
the Funds on behalf of beneficial owners; and providing such other similar
services as the Funds may reasonably request to the extent that the
Distributor and/or the service provider is permitted to do so under
applicable laws or regulations. To the extent that shares are held through
the Advisor, broker-dealer affiliates of the Advisor, such as U.S. Bancorp
Investments, Inc. ("USBI"), or U.S. Bancorp Piper Jaffray Inc. ("Piper"),
those entities may receive shareholder servicing fees from the
Distributor. The shareholder servicing fee is intended to be a "service
fee" as defined in Section 2830 of the NASD Conduct Rules.
The Advisor, the Administrator, the Distributor, and any institution which
has entered into a sales agreement with the Distributor may in their
discretion use their own assets to pay for certain additional costs of
distributing Fund shares or servicing shareholder accounts. Any such
arrangement may be commenced or discontinued by any of these persons at any
time, and any sales promotion arrangement offered by the Advisor, the
Administrator or the Distributor will be offered on a uniform basis to all
entities distributing Fund shares or servicing Fund shareholders unless
otherwise disclosed herein. USBI and Piper have each entered into a sales
agreement with the Distributor. The Advisor may pay USBI and Piper an amount
equal to up to 3% of the net asset value of Fund shares sold through them.
Institutions through which Fund shareholders hold shares may impose
additional charges on such shareholders in connection with services provided
by them, provided that such charges are disclosed to such shareholders.
The Distributor also acts as the principal distributor for the Underlying
Funds and receives compensation (but not for distribution of the class of
shares in which the Funds invest) for such services.
INVESTING IN THE FUNDS
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SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined after
an order is received, without any sales charge, on days on which both the
New York Stock Exchange and federally-chartered banks are open for business.
Shares may be purchased as described below. The Funds reserve the right to
reject any purchase request.
Net asset value is determined as of the close of normal trading on the New
York Stock Exchange (3:00 p.m. Central time) Monday through Friday except on
(i) days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected;
(ii) days during which no shares are tendered for redemption and no orders
to purchase shares are received; and (iii) days in which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited
to, the following federal holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. In addition, net asset value will not
be calculated on Good Friday.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a
financial institution which
<PAGE>
has a sales agreement with the Distributor. An investor may call his or her
financial institution to place an order. Purchase orders must be received by
the financial institution by the time specified by the institution to be
assured same day processing, and purchase orders must be transmitted to and
received by the Funds by 3:00 p.m. Central time in order for shares to be
purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service.
BY MAIL. An investor may place an order to purchase shares of the Funds
directly through the Transfer Agent. Orders by mail will be executed upon
receipt of payment by the Transfer Agent. If an investor's check does not
clear, the purchase will be cancelled and the investor could be liable for
any losses or fees incurred. Third-party checks, credit cards, credit card
checks and cash will not be accepted. When purchases are made by check, the
proceeds of redemptions of the shares purchased are not available until the
Transfer Agent is reasonably certain that the purchase payment has cleared,
which could take up to ten calendar days from the purchase date.
In order to purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (888) 997-8728 before
3:00 p.m. Central time. All information needed will be taken over the
telephone, and the order will be considered placed when the Custodian
receives payment by wire. If the Custodian does not receive the wire by
3:00 p.m. Central time, the order will be executed the next business day.
Federal funds should be wired as follows: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST Systems,
Inc.: Account Number 160234580266; For Further Credit To: (Investor Name
and Fund Name). Shares cannot be purchased by Federal Reserve wire on days
on which the New York Stock Exchange or federally-chartered banks are
closed.
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment for each Fund is $1,000 unless the investment
is in a retirement plan, in which case the minimum investment is $250. The
minimum subsequent investment is $100. The Funds reserve the right to waive
the minimum investment requirement for employees of the Advisor and its
affiliates.
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SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account in the Class A Shares of Prime Obligations Fund
of FAF. Under a systematic exchange program, a shareholder enters an
agreement to purchase shares of one or more Funds over a specified period of
time, and initially purchases Prime Obligations Fund shares in an amount
equal to the total amount of the investment. On a monthly basis a specified
dollar amount of shares of Prime Obligations Fund is exchanged for shares of
the Funds specified. The systematic exchange program of investing a fixed
dollar amount at regular intervals over time has the effect of reducing the
average cost per share of the Funds. This effect also can be achieved
through the systematic investment program described below. A shareholder may
apply for participation in this program through his or her financial
institution or by calling (888) 997-8728.
<PAGE>
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SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account and invested in Fund shares at the net asset
value next determined after an order is received, plus any applicable sales
charge. A shareholder may apply for participation in this program through
his or her financial institution or by calling (888) 997-8728.
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CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
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DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly with respect to the Funds.
Distributions of any net realized long-term capital gains will be made at
least once every 12 months. Dividends and distributions are automatically
reinvested in additional shares of the Fund paying the dividend on payment
dates at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by writing to
the Fund.
All shareholders on the record date are entitled to the dividend. If shares
are purchased before a record date for a dividend or a distribution of
capital gains, a shareholder will pay the full price for the shares and will
receive some portion of the purchase price back as a taxable dividend or
distribution (to the extent, if any, that the dividend or distribution is
otherwise taxable to holders of Fund shares). If shares are redeemed or
exchanged before the record date for a dividend or distribution or are
purchased after the record date, those shares are not entitled to the
dividend or distribution.
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EXCHANGE PRIVILEGE
Shares of a Fund, whether acquired by direct purchase, reinvestment of
dividends on such shares, or otherwise, may be exchanged for shares of the
other Funds without the payment of any sales charge (i.e., at net asset
value). Exchanges of shares among the Funds must meet any applicable minimum
investment of the Fund for which shares are being exchanged.
Shares of the Funds may not be exchanged for shares of the Underlying Funds,
other than Class A Shares of FAF's Prime Obligations Fund.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one Fund by another Fund. This privilege is
available to shareholders resident in any state in which the Fund shares
being acquired may be sold. Exchanges may be accomplished by a written
request, or by telephone if a preauthorized exchange authorization is on
file with the Transfer Agent, shareholder servicing agent, or financial
institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described below under "Redeeming
Shares." None of the Funds, the Distributor, the Transfer Agent, any
shareholder servicing agent, nor any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions.
Telephone exchange instructions made by an investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent or financial institution.
Shares may be exchanged between two Funds by telephone
<PAGE>
only if both Funds have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing
agent or financial institution by the time specified by it, in order for
shares to be exchanged the same day. Neither the Transfer Agent nor any Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Funds and the Transfer Agent will each employ reasonable procedures to
confirm that telephone instructions are genuine, and they may be liable for
losses resulting from unauthorized or fraudulent telephone instructions if
they do not employ these procedures.
Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his or
her broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 330 West Ninth Street, Kansas City, Missouri 64105. The
exchange privilege should not be used to take advantage of short-term swings
in the securities markets. The Funds reserve the right to limit or terminate
exchange privileges as to any shareholder who makes exchanges more than four
times a year (other than through the Systematic Exchange Program or similar
periodic investment programs). The Funds may modify or revoke the exchange
privilege for all shareholders upon 60 days' prior written notice or without
notice in times of drastic economic or market changes.
There are currently no additional fees or charges for the exchange service.
The Funds do not contemplate establishing such fees or charges, but they
reserve the right to do so. Shareholders will be notified of any additional
fees or charges.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, without deduction of any
redemption fee or deferred sales charge. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests can be made
as described below and must be received in proper form.
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BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege
on the initial shareholder application, by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net
asset value next determined after the Fund receives the redemption request
from the financial institution. Redemption requests must be received by the
financial institution by the time specified by the institution in order for
shares to be redeemed at that day's net asset value, and redemption requests
must be transmitted to and received by the Funds by 3:00 p.m. Central time
in order for shares to be redeemed at that day's net asset value. Pursuant
to instructions received from the financial institution, redemptions will be
made by check or by wire transfer. It is the financial institution's
responsibility to transmit redemption requests promptly.
Shareholders who did not purchase their shares of a Fund through a financial
institution may redeem their shares by telephoning (888) 997-8728. At the
shareholder's request, redemption proceeds will be paid by check mailed to
the shareholder's address of record or wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal
Reserve System, normally within one business day, but in no event more than
seven days after the request. Wire instructions must be previously
established on the account or provided in writing. The minimum amount for a
wire transfer is $1,000. If at any time the Funds determine it necessary to
<PAGE>
terminate or modify this method of redemption, shareholders will be
promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. The Transfer Agent
and the Funds will each employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These procedures may
include the taping of telephone conversations. To ensure authenticity of
redemption or exchange instructions received by telephone, the Transfer
Agent examines each shareholder request by verifying the account number
and/or tax identification number at the time such request is made. The
Transfer Agent subsequently sends confirmations of both exchange sales and
exchange purchases to the shareholder for verification. If reasonable
procedures are not employed, the Transfer Agent and the Funds may be liable
for any losses due to unauthorized or fraudulent telephone transactions.
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BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested
to be redeemed, and should be signed exactly as the shares are registered.
Shareholders should call the Fund, the shareholder servicing agent or
financial institution for assistance in redeeming by mail. A check for
redemption proceeds normally is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
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BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate
in the Systematic Withdrawal Program. Under this program, Fund shares are
redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. A shareholder may apply to participate in this program
through his or her financial institution.
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REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing
<PAGE>
House, the proceeds of redemptions of those shares are not available until
the Transfer Agent is reasonably certain that the purchase payment has
cleared, which could take up to ten calendar days from the purchase date.
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ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds
to the shareholder if the account balance falls below the required minimum
value of $500. Shares will not be redeemed in this manner, however, if the
balance falls below $500 because of changes in a Fund's net asset value.
Before shares are redeemed to close an account, the shareholder will be
notified in writing and allowed 60 days to purchase additional shares to
meet the minimum account requirement.
DETERMINING THE PRICE OF SHARES
Shares of the Funds are sold at net asset value, without any sales charge.
Shares are redeemed at net asset value, without deduction of any redemption
fee or deferred sales charge.
The net asset value per share is determined as of the close of normal
trading on the New York Stock Exchange (3:00 p.m. Central time) on each day
the New York Stock Exchange and federally-chartered banks are open for
business, provided that net asset value need not be determined on days when
no Fund shares are tendered for redemption and no order for that Fund's
shares is received and on days on which changes in the value of portfolio
securities will not materially affect the current net asset value of the
Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request.
It is the responsibility of investors' financial institutions promptly to
forward purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or
estates, the Transfer Agent or Fund may require additional documents to
evidence appropriate authority in order to effect the redemption, and the
applicable price will be that next determined following the receipt of the
required documentation.
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DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by
dividing the value of the securities owned by the Fund plus any cash and
other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding.
The assets of each Fund are expected to consist primarily of shares of the
Underlying Funds, which are valued at their respective net asset values. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded
as accrued and dividends will be recorded on the ex-dividend date.
Security valuations of investments in the Underlying Funds are furnished by
an independent pricing service that has been approved by the Board of
Directors. Securities listed on a securities exchange or an automated
quotation system for which quotations are readily available, including
securities traded over the counter, are valued at the last quoted sale price
on the principal exchange on which they are traded on the valuation date,
or, if there is no such reported sale on the valuation date, at the most
recently quoted bid price.
Debt obligations with remaining maturities in excess of sixty days are
valued at the most recently quoted bid price. For such debt obligations the
pricing service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of sixty
<PAGE>
days or less may be valued at their amortized cost which approximates market
value. If a security price cannot be obtained from an independent pricing
service a bid price may be obtained from an independent broker who makes a
market in the security.
Foreign securities owned by the Underlying Funds are valued at the closing
prices on the principal exchange on which they trade.
If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the applicable Board of Directors.
Financial futures held by the Underlying Funds are valued at the settlement
price established each day by the board of exchange on which they are
traded. Portfolio securities underlying actively traded options are valued
at their market price as determined above. The current market value of any
exchange traded options held or written by an Underlying Fund is valued at
the closing bid price for a long position or the closing ask price for a
short position.
Foreign currency forward contracts held by the Underlying Funds are valued
at the current day's interpolated foreign exchange rate, as calculated using
the current day's exchange rate, and the thirty, sixty, ninety and
one-hundred eighty day forward rates provided by the Reuters system.
FEDERAL INCOME TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Code during its current taxable year in order to be
relieved of payment of federal income taxes on amounts of taxable income it
distributes to shareholders.
Dividends paid from each Fund's net investment income and net short-term
capital gains will be taxable to shareholders as ordinary income, whether or
not the shareholder elects to have such dividends automatically reinvested
in additional shares. Dividends paid by the Funds attributable to
investments by the Underlying Funds in the securities of foreign issuers,
debt securities, or REITs will not be eligible for the 70% deduction for
dividends received by corporations.
Dividends paid from the net capital gains of each Fund and designated as
capital gain dividends will be taxable to shareholders as long-term capital
gains, regardless of the length of time for which they have held their
shares in the Fund.
Gain or loss realized upon the sale of shares in the Funds will be treated
as capital gain or loss, provided that the shares represented a capital
asset in the hands of the shareholder. Such gain or loss will be long-term
(subject to a maximum 20% tax rate in the case of individuals, estates and
trusts) if the shares were held for more than one year.
Investment income received by the Funds from sources within foreign
countries may be subject to foreign income taxes withheld at the source. The
Funds will not be able to treat shareholders as having paid their
proportionate share of such taxes for foreign tax credit purposes.
Each Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain accounts whose owners have not complied with IRS regulations. In
order to avoid this withholding requirement, each shareholder will be asked
to certify on the shareholder's account application that the social security
or taxpayer identification number provided is correct and that the
shareholder is not subject to backup withholding for previous underreporting
to the IRS.
This is a general summary of the federal tax laws applicable to the Funds
and their shareholders as of the date of this Prospectus. See the Statement
of Additional Information for further details. Before investing in the
Funds, an investor should consult his or her tax advisor about the
consequences of state and local tax laws.
<PAGE>
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares
may be issued as either full or fractional shares. Fractional shares have
pro rata the same rights and privileges as full shares. Shares of the Funds
have no preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FASF Funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able to
elect all of the directors if they choose to do so. On issues affecting only
a particular Fund, the shares of that Fund will vote as a separate series.
Examples of such issues would be proposals to alter a fundamental investment
restriction pertaining to a Fund or to approve, disapprove or alter a
distribution plan.
The Bylaws of 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 1940 Act.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total
return," its "average annual total return" and its "distribution rate."
Distribution rates may only be used in connection with sales literature and
shareholder communications preceded or accompanied by a Prospectus. Each of
these performance figures is based upon historical results and is not
intended to indicate future performance, and, except for "distribution
rate," is standardized in accordance with Securities and Exchange Commission
regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day
period (which period will be stated in the advertisement) by the maximum
offering price per share on the last day of the period. Yield is an
annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.
"Total return" is based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all expenses. "Cumulative total return"
reflects a Fund's performance over a stated period of time. "Average annual
total return" reflects the hypothetical annually compounded rate that would
have produced the same cumulative total return if performance had been
constant over the entire period. Because average annual returns tend to
smooth out variations in a Fund's performance, they are not the same as
actual year-by-year results.
A Fund's "distribution rate" is determined by dividing the income dividends
per share for a stated period by the maximum offering price per share on the
last day of the period. All distribution rates published for the Funds are
measures of the level of income dividends distributed during a specified
period. Thus, these rates differ from yield (which measures income actually
earned by a Fund) and total return (which measures actual income, plus
realized and unrealized gains or losses of a Fund's investments).
Consequently, distribution rates alone should not be considered complete
measures of performance.
In reports or other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized
unmanaged indices or averages of the performance of similar securities and
to composites of such indices and averages. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent mutual fund rating
<PAGE>
services, and each Fund may include in such reports, communications and
advertising material evaluations published by nationally recognized
independent ranking services and publications. For further information
regarding the Funds' performance, see "Fund Performance" in the Statement of
Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds and the Underlying Funds may invest and related topics.
Further information concerning these matters is contained in the Statement
of Additional Information.
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CASH ITEMS
The "cash items" in which the Funds and the Equity Funds may invest, as
described under "Investment Objectives and Policies" and "The Underlying
Funds," include short-term obligations such as rated commercial paper and
variable amount master demand notes; United States dollar-denominated time
and savings (including certificates of deposit); bankers' acceptances;
obligations of the United States Government or its agencies or
instrumentalities; repurchase agreements collateralized by eligible
investments of an Underlying Fund; securities of other mutual funds which
invest primarily in debt obligations with remaining maturities of 13 months
or less (which investments also are subject to the advisory fee); and other
similar high-quality short-term United States dollar-denominated
obligations.
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U.S. GOVERNMENT SECURITIES
The U.S. government securities in which Fixed Income Fund and Strategic
Income Fund may invest are either issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The U.S. government
securities in which such funds invest principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, and discount notes issued and guaranteed by U.S.
government agencies and instrumentalities supported by the full faith
and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
The government securities in which Fixed Income Fund and Strategic Income
Fund may invest are backed in a variety of ways by the U.S. government or
its agencies or instrumentalities. Some of these securities, such as
Government National Mortgage Association ("GNMA") mortgage-backed
securities, are backed by the full faith and credit of the U.S. government.
Other securities, such as obligations of the Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") are
backed by the credit of the agency or instrumentality issuing the
obligations but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide financial
support to these other agencies or instrumentalities because it is not
obligated to do so.
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REPURCHASE AGREEMENTS
Each of the Underlying Funds may enter into repurchase agreements. A
repurchase agreement involves the purchase by an Underlying Fund of
securities with the agreement that after a stated period of time, the
original seller will buy back the same securities ("collateral") at a
predetermined price or yield. Repurchase agreements involve certain risks
not associated with direct investments in securities. If the original seller
defaults on its obligation to repurchase as a result of its bankruptcy or
otherwise, the purchasing Underlying Fund will seek to sell the collateral,
<PAGE>
which could involve costs or delays. Although collateral (which may consist
of any fixed income security which is an eligible investment for the
Underlying Fund entering into the repurchase agreement) will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest), an Underlying Fund would suffer a loss if the
proceeds from the sale of the collateral were less than the agreed-upon
repurchase price. The advisor of an Underlying Fund or, in the case of
International Fund, Emerging Markets Fund and Strategic Income Fund, their
sub-advisor will monitor the creditworthiness of the firms with which the
Underlying Funds enter into repurchase agreements.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Underlying Funds may purchase securities on a when-issued or
delayed delivery basis. When such a transaction is negotiated, the purchase
price is fixed at the time the purchase commitment is entered, but delivery
of and payment for the securities take place at a later date. An Underlying
Fund will not accrue income with respect to securities purchased on a
when-issued or delayed delivery basis prior to their stated delivery date.
Pending delivery of the securities, each Underlying Fund will maintain in a
segregated account cash or liquid high-grade securities in an amount
sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed delivery basis
exposes an Underlying Fund to risk because the securities may decrease in
value prior to delivery. In addition, an Underlying Fund's purchase of
securities on a when-issued or delayed delivery basis while remaining
substantially fully invested could increase the amount of the Underlying
Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the
Underlying Funds will engage in when-issued and delayed delivery
transactions only for the purpose of acquiring portfolio securities
consistent with their investment objectives, and not for the purpose of
investment leverage. A seller's failure to deliver securities to an
Underlying Fund could prevent the Underlying Fund from realizing a price or
yield considered to be advantageous. Prime Obligations Fund will not
purchase securities on a when-issued or delayed delivery basis if, as a
result thereof, more than 15% of its net assets would be so invested.
In connection with their ability to purchase securities on a when-issued or
delayed delivery basis, Fixed Income Fund and Strategic Income Fund may
enter into mortgage "dollar rolls" in which the fund sells securities and
simultaneously contracts with the same counterparty to repurchase similar
(same type, coupon and maturity) but not identical securities on a future
date. In a mortgage dollar roll, Fixed Income Fund and Strategic Income Fund
give up the right to receive principal and interest paid on the securities
sold. However, these Underlying Funds would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase plus any fee income received. Unless
such benefits exceed the income, capital appreciation and gain or loss due
to mortgage prepayments that would have been realized on the securities sold
as part of the mortgage dollar roll, the use of this technique will diminish
the investment performance of Fixed Income Fund and Strategic Income Fund
compared with what such performance would have been without the use of
mortgage dollar rolls. Fixed Income Fund and Strategic Income Fund will hold
and maintain in segregated accounts until the settlement date cash or liquid
securities in an amount equal to the forward purchase price.
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ZERO COUPON SECURITIES
Fixed Income Fund and Strategic Income Fund may invest in zero coupon, fixed
income securities. Zero coupon securities pay no cash income to their
holders until they mature and are issued at substantial discounts from their
value at maturity.
<PAGE>
When held to maturity, their entire return comes from the difference between
their purchase price and their maturity value. Because interest on zero
coupon securities is not paid on a current basis, the values of securities
of this type are subject to greater fluctuations than are the value of
securities that distribute income regularly and may be more speculative than
such securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall.
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FLOATING RATE CORPORATE DEBT OBLIGATIONS
Strategic Income Fund expects to invest in floating rate corporate debt
obligations, including increasing rate securities. Fixed Income Fund also
may invest in floating rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above
prevailing market rates. The interest rate paid on these securities is then
reset periodically (commonly every 90 days) to an increment over some
predetermined interest rate index. Common utilized indices include the
three-month Treasury bill rate, the 180-day Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
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FIXED RATE CORPORATE DEBT OBLIGATIONS
Strategic Income Fund and Fixed Income Fund will also invest in fixed rate
securities. Fixed Income Fund invests at least 65% of its total assets in
fixed rate obligations. Fixed rate securities tend to exhibit more price
volatility during times of rising or falling interest rates than securities
with floating rates of interest. This is because floating rate securities,
as described above, behave like short-term instruments in that the rate of
interest they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest and
are more sensitive to fluctuating interest rates. In periods of rising
interest rates the value of a fixed rate security is likely to fall. Fixed
rate securities with short-term characteristics are not subject to the same
price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
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PARTICIPATION INTERESTS
Strategic Income Fund may acquire participation interests in senior, fully
secured floating rate loans that are made primarily to U.S. companies.
Strategic Income Fund's investments in participation interests are subject
to its limitation on investments in illiquid securities. Strategic Income
Fund may purchase only those participation interests that mature in one year
or less, or, if maturing in more than one year, have a floating rate that is
automatically adjusted at least once each year according to a specified rate
for such investments, such as a published interest rate or interest rate
index. Participation interests are primarily dependent upon the
creditworthiness of the borrower for payment of interest and principal. Such
borrowers may have difficulty making payments and may have senior securities
rated as low as C by Moody's, or D by Standard & Poor's.
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LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Underlying Funds may
lend portfolio securities representing up to one-third of the value of its
total assets to broker-dealers, banks or other institutional borrowers of
securities. As with other extensions of credit, there may be risks of delay
in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the
Underlying Funds will only enter into loan arrangements with broker-dealers,
banks or other institutions which its advisor or, in the
case of International Fund, Emerging Markets Fund and Strategic Income Fund,
their sub-advisor has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements,
<PAGE>
the Underlying Funds will receive collateral in the form of cash, United
States Government securities or other high-grade debt obligations equal to
at least 100% of the value of the securities loaned. Collateral is marked to
market daily. The Underlying Funds will pay a portion of the income earned
on the lending transaction to the placing broker and may pay administrative
and custodial fees (including fees paid to an affiliate of the Advisor) in
connection with these loans which, in the case of U.S. Bank are 40% of the
Funds' income from such securities lending transactions.
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OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Underlying Funds, other than Prime
Obligations Fund, may purchase put and call options. These transactions will
be undertaken only for the purpose of reducing risk to the Underlying Funds;
that is, for "hedging" purposes. Depending on the Underlying Fund, these
transactions may include the purchase of put and call options on equity
securities, on stock indices, on interest rate indices, or (only in the case
of International Fund, Emerging Markets Fund and Strategic Income Fund) on
foreign currencies. Options on futures contracts are discussed below under
"Futures and Options on Futures."
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the
obligation to sell, the underlying security at the exercise price at any
time before the option expires. The purchase price for a put or call option
is the "premium" paid by the purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option.
None of the Underlying Funds other than International Fund, Mid Cap Growth
Fund and Emerging Markets Fund will invest more than 5% of the value of its
total assets in purchased options, provided that options which are "in the
money" at the time of purchase may be excluded from this 5% limitation. A
call option is "in the money" if the exercise price is lower than the
current market price of the underlying security or index, and a put option
is "in the money" if the exercise price is higher than the current market
price. An Underlying Fund's loss exposure in purchasing an option is limited
to the sum of the premium paid and the commission or other transaction
expenses associated with acquiring the option.
The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by an Underlying Fund and the prices of options, and the
risk of limited liquidity in the event that an Underlying Fund seeks to
close out an options position before expiration by entering into an
offsetting transaction.
WRITING OF CALL OPTIONS. The Underlying Funds may write (sell) covered call
options to the extent specified with respect to particular Underlying Funds
under "The Underlying Funds." These transactions would be undertaken
principally to produce additional income. Depending on the Underlying Fund,
these transactions may include the writing of covered call options on equity
securities or (only in the case of International Fund, Emerging Markets Fund
and Strategic Income Fund) on foreign currencies which an Underlying Fund
owns or has the right to acquire or on interest rate indices.
When an Underlying Fund sells a covered call option, it is paid a premium by
the purchaser. If the market price of the security covered by the option
does not increase above the exercise price
<PAGE>
before the option expires, the option generally will expire without being
exercised, and the Underlying Fund will retain both the premium paid for the
option and the security. If the market price of the security covered by the
option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case
the Underlying Fund will be required to sell the security at the exercise
price, and it will not realize the benefit of increases in the market price
of the security above the exercise price of the option.
The Equity Funds also may write call options on indices, the movements of
which generally correlate with those of the respective Equity Funds'
portfolio holdings. These transactions, which would be undertaken
principally to produce additional income, entail the risk of an imperfect
correlation between movements of the index covered by the option and
movements in the price of the applicable Equity Fund's portfolio securities.
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FUTURES AND OPTIONS ON FUTURES
The Funds, as well as Fixed Income Fund, Strategic Income Fund,
International Fund and Emerging Markets Fund, may engage in futures
transactions and purchase options on futures as described with respect to
the Funds under "Investment Objectives and Policies -- Investment Policies"
and with respect to such Underlying Funds under "The Underlying Funds." This
includes, for International Fund, Emerging Markets Fund and Strategic Income
Fund, entering into contracts for the future delivery of foreign currencies.
A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. A futures contract on an index obligates the seller to
deliver, and entitles the purchaser to receive, an amount of cash equal to a
specific dollar amount times the difference between the value of the index
at the expiration date of the contract and the index value specified in the
contract. The acquisition of put and call options on futures contracts will,
respectively, give a fund the right (but not the obligation), for a
specified exercise price, to sell or to purchase the underlying futures
contract at any time during the option period.
The Funds may use futures contracts and options on futures for the purposes
specified under "Investment Objectives and Policies -- Investment Policies."
An Underlying Fund may use futures contracts and options on futures in an
effort to hedge against market risks and, in the case of International Fund,
Emerging Markets Fund and Strategic Income Fund, as part of its management
of foreign currency transactions.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's or Underlying Fund's
total assets, and the value of securities that are the subject of such
futures and options (both for receipt and delivery) may not exceed 1/3 of
the market value of International Fund's and Emerging Market Fund's total
assets. Futures transactions will be limited to the extent necessary to
maintain each Fund's and Underlying Fund's qualification as a regulated
investment company under the Code.
Where a Fund or an Underlying Fund is permitted to purchase options on
futures, its potential loss is limited to the amount of the premiums paid
for the options. As stated above, this amount may not exceed 5% of a Fund's
or Underlying Fund's total assets. Where a Fund or an Underlying Fund is
permitted to enter into futures contracts obligating it to purchase
securities, currency or an index in the future at a specified price, such
Fund or Underlying Fund could lose 100% of its net assets in connection
therewith if it engaged extensively in such transactions and if the market
value or index value of the subject securities, currency or index at the
delivery or settlement date fell to zero for all contracts into which a Fund
or Underlying Fund was permitted to enter. Where an Underlying Fund is
permitted to enter into futures contracts obligating it to sell securities
or currencies (as is the case with respect only to International Fund,
Emerging Markets Fund and Strategic Income Fund), its potential losses are
unlimited if it does
<PAGE>
not own the securities or currencies covered by the contracts and it is
unable to close out the contracts prior to the settlement date.
Futures transactions involve brokerage costs and require a Fund or
Underlying Fund to segregate assets to cover contracts that would require it
to purchase securities or currencies. A Fund or Underlying Fund may lose the
expected benefit of futures transactions if interest rates, exchange rates
or securities prices move in an unanticipated manner. Such unanticipated
changes may also result in poorer overall performance than if the Fund or
Underlying Fund had not entered into any futures transactions. In addition,
the value of a Fund's or Underlying Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting the Fund's or Underlying Fund's
ability to hedge effectively against interest rate, exchange rate and/or
market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out futures
positions.
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FIXED INCOME SECURITIES -- EQUITY FUNDS
The fixed income securities in which the Equity Funds may invest include
securities issued or guaranteed by the United States Government or its
agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations of the
kinds described above under "-- Cash Items." Investments in nonconvertible
preferred stocks and nonconvertible corporate debt securities will be
limited to securities which are rated at the time of purchase not less than
BBB by Standard & Poor's or Baa by Moody's (or equivalent short-term
ratings), or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the advisor. Obligations rated BBB,
Baa or their equivalent, although investment grade, have speculative
characteristics and carry a somewhat higher risk of default than obligations
rated in the higher investment grade categories.
In addition, Equity Income Fund may invest up to 25% of its total assets,
and each of the other Equity Funds may invest up to 5% of its net assets, in
less than investment grade convertible debt obligations. For a description
of such obligations and the risks associated therewith, see "The Underlying
Funds -- Equity Income Fund."
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FOREIGN SECURITIES
GENERAL. Under normal market conditions International Fund and Emerging
Markets Fund each invests at least 65% of its total assets in equity
securities which trade in markets other than the United States. Strategic
Income Fund normally invests a significant portion of its assets in foreign
government and foreign corporate debt obligations, and from time to time may
invest up to 100% of its total assets in such obligations. 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.
Fixed Income Fund may invest up to 15% of its total assets in foreign
securities payable in United States dollars. These securities may include
securities issued or guaranteed by (i) the government of Canada, any
Canadian province, or any instrumentality or political subdivision thereof;
(ii) any other foreign government, agency or instrumentality; (iii) foreign
subsidiaries of United States corporations; and (iv) foreign banks having
total capital and surplus at the time of investment of at least $1 billion.
Such foreign bank or corporate securities must be rated by at least one
major United States rating agency as having a quality not less than that
which would be required for comparable domestic securities. In addition,
Fixed Income Fund also may invest in Eurodollar Certificates of Deposit,
Eurodollar Time Deposits and Yankee Certificates of Deposit as described
under "-- Bank Instruments" below.
<PAGE>
Prime Obligations Fund may invest in United States dollar-denominated
obligations of foreign banks, United States branches of foreign banks, and
foreign branches of United States banks, subject to the limitations
described under "The Underlying Funds -- Prime Obligations Fund" above.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition
of exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation,
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Foreign securities also may be
subject to greater fluctuations in price than securities issued by United
States corporations. The principal markets on which these securities trade
may have less volume and liquidity, and may be more volatile, than
securities markets in the United States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to United
States domestic companies. There is also generally less government
regulation of securities exchanges, brokers and listed companies abroad than
in the United States. Confiscatory taxation or diplomatic developments could
also affect investment in those countries. In addition, foreign branches of
United States banks, foreign banks and foreign issuers may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of United States banks and United States domestic issuers.
EMERGING MARKETS. Emerging Markets Fund, Strategic Income Fund and, to a
lesser degree, International Fund, may invest in securities issued by
governmental and corporate issuers that are located in emerging market
countries. Investing in securities of issuers in emerging markets involves
exposure to economic infrastructures that are generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of
emerging market countries that may affect investment in their markets
include certain governmental policies that may restrict investment by
foreigners and the absence of developed legal structures governing private
and foreign investments and private property. The typical small size of the
markets for securities issued by issuers located in emerging markets and the
possibility of low or non-existent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those
securities. In addition, issuers in emerging market countries are typically
subject to a greater degree of change in earnings and business prospects
than are companies in developed markets.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many
foreign securities, United States dollar-denominated American Depositary
Receipts, which are traded in the United States on exchanges or over-the-
counter, are issued by domestic banks. American Depositary Receipts
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. American Depositary Receipts do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in American Depositary Receipts rather than
directly in foreign securities, Equity Fund or Strategic Income Fund can
avoid currency risks during the settlement period for either purchases or
sales. In general, there is a large, liquid market in the United States for
many American Depositary Receipts. The information available for American
Depositary Receipts is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are
traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. International Fund, Emerging
<PAGE>
Markets Fund and Strategic Income Fund also may invest in European
Depositary Receipts, which are receipts evidencing an arrangement with a
European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European Depositary Receipts,
typically those denominated as unsponsored, require the holders thereof to
bear most of the costs of the facilities while issuers of sponsored
facilities normally pay more of the costs thereof. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through the voting rights to facility holders in
respect to the deposited securities, whereas the depository of a sponsored
facility typically distributes shareholder communications and passes through
voting rights.
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FOREIGN CURRENCY TRANSACTIONS
International Fund, Emerging Markets Fund and Strategic Income Fund invest
in securities which are purchased and sold in foreign currencies. The value
of their assets as measured in United States dollars therefore may be
affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. International Fund, Emerging Markets
Fund and Strategic Income Fund also will incur costs in converting United
States dollars to local currencies, and vice versa.
International Fund, Emerging Markets Fund and Strategic Income Fund will
conduct their foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date certain at a specified
price. These forward currency contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
International Fund, Emerging Markets Fund and Strategic Income Fund may
enter into forward currency contracts in order to hedge against adverse
movements in exchange rates between currencies. They may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date such Underlying Funds contract to purchase or
sell a security and the settlement date, or to "lock in" the United States
dollar equivalent of a dividend or interest payment made in a foreign
currency. They also may engage in "portfolio hedging" to protect against a
decline in the value of their portfolio securities as measured in United
States dollars which could result from changes in exchange rates between the
United States dollar and the foreign currencies in which the portfolio
securities are purchased and sold. International Fund, Emerging Markets Fund
and Strategic Income Fund also may hedge their foreign currency exchange
rate risk by engaging in currency financial futures and options
transactions.
Although a foreign currency hedge may be effective in protecting
International Fund, Emerging Markets Fund and Strategic Income Fund from
losses resulting from unfavorable changes in exchanges rates between the
United States dollar and foreign currencies, it also would limit the gains
which might be realized by these Underlying Funds, from favorable changes in
exchange rates. The decision of an Underlying Fund's respective sub-advisor
whether to enter into currency hedging transactions will depend in part on
its view regarding the direction and amount in which exchange rates are
likely to move. The forecasting of movements in exchange rates is extremely
difficult, so that it is highly uncertain whether a hedging strategy, if
undertaken, would be successful. To the extent that such sub-advisor's view
regarding future exchange rates proves to have been incorrect, International
Fund, Emerging Markets Fund and Strategic Income Fund may realize losses on
their foreign currency transactions.
<PAGE>
International Fund, Emerging Markets Fund and Strategic Income Fund do not
intend to enter into forward currency contracts or maintain a net exposure
in such contracts where they would be obligated to deliver an amount of
foreign currency in excess of the value of their portfolio securities or
other assets denominated in that currency.
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PAYMENT-IN-KIND DEBENTURES AND DELAYED INTEREST SECURITIES
Strategic Income Fund may invest in debentures the interest on which may be
paid in other securities rather than cash ("PIKs"). Typically, during a
specified term prior to the debenture's maturity, the issuer of a PIK may
provide for the option or the obligation to make interest payments in
debentures, common stock or other instruments (i.e. "in kind" rather than in
cash). The type of instrument in which interest may or will be paid would be
known by Strategic Income Fund at the time of investment. While PIKs
generate income for purposes of generally accepted accounting standards,
they do not generate cash flow and thus could cause Strategic Income Fund to
be forced to liquidate securities at an inopportune time in order to
distribute cash, as required by the Code.
Unlike PIKs, delayed interest securities do not pay interest for a specified
period. Because values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income
regularly, they may be more speculative than such securities. Accordingly,
the values of these securities may be highly volatile as interest rates rise
or fall.
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CORPORATE EQUITY SECURITIES
Strategic Income Fund may also invest in equity securities including common
stocks, warrants and rights issued by corporations in any industry
(industrial, financial or utility) which may be denominated in U.S.
dollars or in foreign currencies.
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PREFERRED STOCK
Fixed Income Fund and Strategic Income Fund may invest in preferred stock.
Preferred stock, unlike common stock, offers a stated dividend rate payable
from the issuer's earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price
of preferred stocks to decline. Preferred stock may have mandatory sinking
fund provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline.
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MORTGAGE-BACKED SECURITIES
Fixed Income Fund and Strategic Income Fund may invest in mortgage-backed
securities which are Agency Pass-Through Certificates or collateralized
mortgage obligations ("CMOs"), as described below. In addition, Strategic
Income Fund may invest in Real Estate Mortgage Investment Conducts
("REMICs").
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA,
FNMA or FHLMC. The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.
<PAGE>
CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. Fixed Income Fund will invest only in CMOs
which are rated in one of the four highest rating categories by a nationally
recognized statistical rating organization or which are of comparable
quality in the judgment of the advisor. Strategic Income Fund has no minimum
rating requirement for these investments. Because CMOs are debt obligations
of private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and
creditworthiness typically depend, among other factors, on the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. For instance, holders may hold interests in
CMO tranches called Z-tranches which defer interest and principal payments
until one or more other classes of the CMO have been paid in full. Examples
of the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fixed Income Fund and Strategic Income
Fund may invest include classes which are subordinated in right of payment
to other classes, as long as they have the required rating referred to
above.
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages.
Once REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity and is
taxed to the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests," some of
which may offer adjustable rates of interest (the type in which Strategic
Income Fund primarily invests), and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict
the effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds.
When interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely
to decline more sharply in periods of increasing interest rates than that of
a fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Fixed Income
Fund and Strategic Income Fund will not invest more than 10% of their total
assets in interest-only, principal-only or inverse floating rate mortgage
backed securities.
----------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Fixed Income Fund and Strategic Income Fund may invest in asset-backed
securities. Asset-backed securities generally constitute interests in, or
obligations secured by, a pool of receivables other than mortgage loans,
such as automobile loans and leases, credit card receivables, home equity
loans and trade receivables. Asset-backed securities generally are issued by
a private special-purpose entity. Their ratings and creditworthiness
typically depend on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy, as well as on the
credit quality
<PAGE>
of the underlying receivables and the amount and credit quality of any
third-party credit enhancement supporting the underlying receivables or the
asset-backed securities. Asset-backed securities and their underlying
receivables generally are not issued or guaranteed by any governmental
entity.
----------------------------------------------------------------------------
BANK INSTRUMENTS
The bank instruments in which Fixed Income Fund and Strategic Income Fund
may invest include time and savings deposits, deposit notes and bankers
acceptances (including certificates of deposit) in commercial or savings
banks. They also include Eurodollar Certificates of Deposit issued by
foreign branches of United States or foreign banks; Eurodollar Time
Deposits, which are United States dollar-denominated deposits in foreign
branches of United States or foreign banks; and Yankee Certificates of
Deposit, which are United States dollar-denominated certificates of deposit
issued by United States branches of foreign banks and held in the United
States. For a description of certain risks of investing in foreign issuers'
securities, see "-- Foreign Securities" above. In each instance, Fixed
Income Fund and Strategic Income Fund may only invest in bank instruments
issued by an institution which has capital, surplus and undivided profits of
more than $100 million or the deposits of which are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund.
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LOAN PARTICIPATIONS; SECTION 4(2) AND RULE 144A SECURITIES
The loan participation interests in which Prime Obligations Fund may invest
represent pro rata undivided interests in an underlying bank loan.
Participation interests, like the underlying loans, may have fixed,
floating, or variable rates of interest. The bank selling a participation
interest generally acts as a mere conduit between its borrower and the
purchasers of interests in the loan. The purchaser of an interest generally
does not have recourse against the bank in the event of a default on the
underlying loan. Therefore, the credit risk associated with such instruments
is governed by the creditworthiness of the underlying borrowers and not by
the banks selling the interests. Loan participation interests that can be
sold within a seven-day period are deemed by the advisor to be liquid
investments. If a loan participation interest is restricted from being sold
within a seven-day period, then it, as a fundamental policy, will be
limited, together with other illiquid investments, to not more than 10% of
Prime Obligations Fund's total assets. Commercial paper issued in reliance
on the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 and corporate obligations qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the
Securities Act of 1933 meet the criteria for liquidity established by the
Board of Directors and are quite liquid. Consequently, Prime Obligations
Fund does not intend to subject such securities to the limitation applicable
to restricted securities.
----------------------------------------------------------------------------
CREDIT ENHANCEMENT AGREEMENTS
Prime Obligations Fund may arrange for guarantees, letters of credit, or
other forms of credit enhancement agreements (collectively, "Guarantees")
for the purpose of further securing the payment of principal and/or interest
on Prime Obligation Fund's investment securities. Although each investment
security, at the time it is purchased, must meet Prime Obligations Fund's
creditworthiness criteria, Guarantees sometimes are purchased from banks and
other institutions (collectively, "Guarantors") when the advisor, through
yield and credit analysis, deems that credit enhancement of certain of Prime
Obligations Fund's securities is advisable. As a non-fundamental policy,
Prime Obligations Fund will limit the value of all investment securities
issued or guaranteed by each Guarantor to not more than 10% of the value of
Prime Obligations Fund's total assets.
<PAGE>
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MONEY MARKET FUNDS
When an Underlying Fund is permitted to invest a portion of its assets in
securities of other mutual funds which invest primarily in debt obligations
with remaining maturities of 13 months or less (i.e., in money market
funds), the other funds in which it is permitted to invest include money
market funds advised by the Underlying Fund's advisor. Investments by the
Underlying Funds in money market funds advised by such advisor are subject
to certain restrictions contained in an exemptive order issued by the SEC
with respect thereto. Where Prime Obligations Fund invests in other money
market funds, the permitted investments of such other money market funds
must constitute permitted investments of Prime Obligations Fund.
----------------------------------------------------------------------------
INVESTMENT RESTRICTIONS OF THE UNDERLYING FUNDS
The fundamental and nonfundamental investment restrictions of the Underlying
Funds are set forth in full in their Statements of Additional Information.
The fundamental restrictions include the following:
* None of the Equity Funds, Fixed Income Fund or Strategic Income Fund
will borrow money, except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of the
borrowing Underlying Fund's total assets.
* None of such 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. If an
Underlying Fund engages in borrowing, its share price may be subject to
greater fluctuation, and the interest expense associated with the
borrowing may reduce the Underlying Fund's net income.
* None of the Underlying Funds will make short sales of securities.
* None of the Underlying Funds will purchase any securities on margin
except, in the case of the Equity Funds and Fixed Income Fund, to obtain
such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Small Cap Growth Fund,
International Fund, Emerging Markets Fund and Strategic Income Fund as
may be necessary to make margin payments in connection with foreign
currency, futures and other derivative transactions.
* Prime Obligations Fund will not purchase a security if, as a result: (i)
more than 10% of its net assets would be in illiquid assets including
time deposits and repurchase agreements maturing in more than seven
days; or (ii) 25% or more of its total assets would be in any single
industry, except that there is no limitation on the purchase of
obligations of domestic commercial banks (excluding, for this purpose,
foreign branches of domestic commercial banks). Limitation (ii) does not
apply to obligations issued or guaranteed by the United States or its
agencies or instrumentalities.
* Prime Obligations Fund will not 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.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Underlying Fund, as defined in the 1940
Act.
<PAGE>
INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES
U.S. Bank National Association and other affiliates of U.S. Bancorp may act
as fiduciary with respect to plans subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and other trust and agency accounts that
invest in the Funds. These U.S. Bancorp affiliates may receive compensation
from the Funds for the services they provide to the Funds, as described more
fully in the following sections of this Prospectus:
Investment advisory services -- see "Management-Investment Advisor to the
Funds"
Custodian services -- see "Management-Custodian"
Sub-administration services -- see "Management-Administrator"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"
Transfer agent services -- see "Management-Transfer Agent"
<PAGE>
FIRST AMERICAN STRATEGY FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FASF-3000 (7/98)
<PAGE>
FIRST AMERICAN STRATEGY FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 31, 1998
AS SUPPLEMENTED ON MAY 15, 1998 AND JULY 24, 1998
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 January
31, 1998 as supplemented on May 15, 1998 and July 24, 1998. 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: (888)
997-8728. Please retain this Statement of Additional Information for future
reference.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
General Information .............................. 2 Distributor and Shareholder Service
Plan and Agreement ....................... 20
Investment Restrictions of the Funds ............. 3 Custodian; Transfer Agent; Counsel;
Accountants .............................. 21
Additional Information Concerning
Investments by the Funds and the Investment Advisory Services for the
Underlying Funds ................................. 5 Underlying Funds ................................. 21
Short-Term Investments ....................... 5 Investment Advisory Agreements of
Repurchase Agreements ........................ 5 the Underlying Funds ..................... 21
When-Issued and Delayed Delivery Sub-advisory Agreements for International
Transactions ............................. 6 Fund, Emerging Markets Fund
Lending of Portfolio Securities .............. 6 and Strategic Income Fund ................ 22
Options Transactions ......................... 6 Portfolio Managers for the Underlying
Futures and Options on Futures ............... 7 Funds .................................... 23
Foreign Securities ........................... 8
Foreign Currency Transactions ................ 8 Portfolio Transactions and Allocation
Mortgage-Backed Securities ................... 9 of Brokerage .................................... 25
Debt Obligations Rated Less Than
Investment Grade ......................... 11 Capital Stock .................................... 27
Investment Restrictions of the Underlying Net Asset Value and Public Offering
Funds ............................................ 12 Price ........................................... 29
Restrictions Applicable to the Equity
Funds and Fixed Income Fund .............. 12 Fund Performance ................................. 29
Restrictions Applicable to Prime Obligations SEC Standardized Performance Figures ......... 29
Fund ..................................... 14 Non-Standard Distribution Rates .............. 31
Certain Performance Comparisons .............. 31
Directors and Executive Officers ................. 16
Directors .................................... 16 Taxation ......................................... 32
Executive Officers ........................... 16
Compensation ................................. 17 Ratings .......................................... 33
Ratings of Corporate Debt Obligations
Investment Advisory and Other Services and Municipal Bonds ...................... 34
for the Funds .................................... 18 Ratings of Preferred Stock ................... 35
Investment Advisory Agreement ................ 18 Ratings of Commercial Paper .................. 36
Administration Agreement ..................... 19 Best's Rating System for Insurance
Companies ................................ 36
Financial Statements ............................. 37
</TABLE>
<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 Advisor. These other mutual
funds include Real Estate Securities Fund, Equity Income Fund, Large Cap Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small
Cap Value Fund, International Fund, Mid Cap Growth Fund, Emerging Markets Fund,
Strategic Income 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 its assets, except portfolio securities representing up to
one-third of the value of its 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.
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 such 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 Advisor, and repurchase agreements may be
entered into on a joint basis by the Underlying Funds and other funds advised by
the Advisor, 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 Rating Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's"), or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization. The
Funds and the Underlying Funds also may invest in commercial paper that is not
rated but that is determined by the Advisor to be of comparable quality to
instruments that are so rated. For a description of the rating categories of
Standard & Poor's 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 Advisor or, in the case of
International Fund, its sub-advisor will consider the earning power, cash flow,
and other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand.
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
<PAGE>
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).
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 maintain in a
segregated account cash or liquid securities in an amount of sufficient to meet
its purchase 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
Advisor 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 Advisor or sub-advisor 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, U.S. Bank National Association, the
Funds' and the Underlying Funds' custodian and an affiliate of the Advisor, 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.
<PAGE>
OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.
OPTIONS ON INTEREST RATE INDICES. An option on an interest rate
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing value of the interest rate index upon which the
option is based is greater than, in the case of a call, or lesser than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the "multiplier").
The writer of the option is obligated, for the premium received, to make
delivery of this amount. Unlike interest rate futures options contracts,
settlements for interest rate index options are always in cash. Gain or loss
depends on price movements in the interest rate movements with respect to
specific financial instruments. As with stock index options, the multiplier for
interest rate index options determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current value of the underlying interest rate index. Options on different
interest rate indices may have different multipliers.
FUTURES AND OPTIONS ON FUTURES
As discussed in the 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
<PAGE>
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 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 (excluding Real Estate Securities Fund) 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, Emerging Markets Fund
and Strategic Income Fund may engage in a variety of foreign currency
transactions in connection with its investment activities. These include forward
foreign currency exchange contracts, foreign currency futures, and foreign
currency options.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers. None of International Fund,
Emerging Markets Fund or Strategic Income Fund will enter into such forward
contracts or maintain a net exposure in such contracts where such 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,
Emerging Markets Fund and Strategic Income 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, Emerging Markets Fund and Strategic Income Fund generally
will not enter into a forward contract with a term longer than one year.
<PAGE>
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, Emerging Markets Fund and Strategic
Income Fund may use foreign currency futures contracts and options on such
futures contracts. Through the purchase or sale of such contracts, these funds
may be able to achieve many of the same objectives as through forward foreign
currency exchange contracts more effectively and possibly at a lower cost.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the 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, Emerging Markets Fund and Strategic
Income Fund against an adverse movement in the value of a foreign currency, it
would not limit the gain which might result from a favorable movement in the
value of the currency. For example, if such funds 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 such
fund's gain would be offset in part by the premium paid for the option.
Similarly, if any of International Fund, Emerging Markets Fund or Strategic
Income 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, such fund would not need to exercise its call if the currency instead
depreciated in value. In such a case, such 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 and Strategic
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.
<PAGE>
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 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.
<PAGE>
* 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 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 an Underlying Fund to
value and dispose of such obligations. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of less than investment grade obligations, especially in a
thin secondary trading market.
Certain risks also are associated with the use of credit ratings as
a method for evaluating less than investment grade debt obligations. For
example, credit ratings evaluate the safety of principal and interest payments,
not the market value risk of such obligations. In addition, credit rating
agencies may not timely change credit ratings to reflect current events. Thus,
the success of a Fund's use of less than investment grade convertible debt
obligations may be more dependent on its Advisor'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, STRATEGIC INCOME FUND 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,
Strategic Income Fund and Fixed Income Fund are subject to the investment
restrictions set forth below. The investment restrictions set forth in
paragraphs 1 through 9 below are fundamental and cannot be changed with respect
to 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, Strategic Income Fund or Fixed Income Fund
will:
1. 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. Make short sales of securities.
5. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except, in the case of Small Cap Growth Fund, International Fund,
Emerging Markets Fund and Strategic Income Fund, as may be necessary
to make margin payments in connection with foreign currency futures
and other derivative transactions.
6. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat,
food, fiber, metals, petroleum, petroleum-based products or natural
gas) or futures or options contracts with respect to physical
commodities. This restriction shall not restrict any 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.
7. 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
<PAGE>
Income Fund, Real Estate Securities Fund, Small Cap Growth Fund,
International Fund and Strategic Income Fund may invest in
mortgage-backed securities.
8. Act as an underwriter of securities of other issuers, except to the
extent such an Underlying Fund may be deemed to be an underwriter,
under Federal securities laws, in connection with the disposition of
portfolio securities.
9. Lend any of its 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,
Strategic Income Fund or Fixed Income Fund will:
10. Invest more than 15% of its net assets in all forms of illiquid
investments.
11. Invest for the purpose of exercising control or management.
12. Purchase or sell real estate limited partnership interests (other
than, in the case of 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.
13. 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 Real Estate Securities Fund, Equity Income Fund,
Large Cap Value Fund, Large Cap Growth Fund, Mid Cap Value Fund,
Small Cap Growth Fund, Small Cap Value 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.
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
<PAGE>
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 Advisor. 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 Objectives 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
Advisor 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 non-fundamental 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.
Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado
80202: Director of FAIF, FAF and FASF since October 1997; Vice President, North
America - Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President, Customer Service for
United Airlines in the West Region in San Francisco, California and the Mountain
Region in Denver, Colorado; employed at United Airlines since 1967. Age: 51.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and 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 from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FASF since June 1996, of FAIF since August 1987 and of FAF since
April 1991; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.
EXECUTIVE OFFICERS
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
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: 38.
<PAGE>
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 Investments Company ("SEI"), SEI Investments
Management Corporation (the "Administrator") and the Distributor since 1981.
Age: 53.
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: 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: 41.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since December
1996; Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Joseph M. O'Donnell, Vice President and Assistant Secretary of FAIF,
FAF and FASF beginning in February 1998; Vice President and Assistant Secretary
of the Administrator and Distributor since January 1998; Vice President and
General Counsel, FPS Services, Inc. from 1993 to 1997; Staff Counsel and
Secretary, Provident Mutual Family of Funds from 1990 to 1993. Age: 43.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania
19456: Controller of FAIF, FAF and FASF since December 1997; Associate Director,
Funds Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (1993-1997);
Registered Representative, First Investors, from 1988 to 1990. Age: 32.
Lydia A. Gavalis, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
January 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 33
Lynda J. Streigel, SEI Investments Company, Oaks, Pennsylvania
19456; Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice
President and Assistant Secretary of the Administrator and the Distributor since
January 1998; Senior Asset Management Counsel, Barnett Banks, Inc. from 1993 to
1997; Partner, Groom and Nordberg, Chartered from 1996 to 1997; and Associate
General Counsel, Riggs Bank, N.A. from 1992 to 1995. Age: 49
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of
SEI Investments Company since 1997; Assistant Controller of SEI Investments
Company from 1995 to 1997; and Vice President of SEI Investments Company from
1991 to 1995. Age: 39.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of 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
<PAGE>
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 committee or Board meeting but instead receive
the greater of the total per diem fee or meeting fee. Legal fees and expenses
are also paid to Dorsey & Whitney LLP, the law firm of which Michael J. Radmer,
secretary of 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, 1997. No executive officer or
affiliated person of FASF had aggregate compensation from FASF in excess of
$60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position(1) From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
------------------- --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $66 - 0 - - 0 - $33,500
Roger A. Gibson * -0- - 0 - - 0 - - 0 -
Andrew M. Hunter III, Director $59 - 0 - - 0 - $23,250
Leonard W. Kedrowski, Director $62 - 0 - - 0 - $32,700
Robert L. Spies, Director $59 - 0 - - 0 - $24,050
Joseph D. Strauss, Director $73 - 0 - - 0 - $39,925
Virginia L. Stringer, Director $90 - 0 - - 0 - $39,925
</TABLE>
- --------------------
* Not a director during the fiscal year ended September 30, 1997.
(1) Gae B. Veit resigned as a director of FAIF, FASF and FAF on September 12,
1997.
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association (the "Advisor"), 601 Second Avenue
South, Minneapolis, Minnesota 55402, serves as the investment Advisor and
manager of the Funds through its First American Asset Management group. The
Advisor 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 Advisor is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55480, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro forma
combined basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.
<PAGE>
Pursuant to an Investment Advisory Agreement dated as of October 1,
1996 (the "Advisory Agreement"), the Funds engage the Advisor to act as
investment Advisor for and to manage the investment of the assets of the Funds.
Each Fund pays the Advisor monthly fees calculated on an annual basis equal to
0.25% of its average daily net assets.
The Advisory Agreement requires the Advisor to provide FASF with all
necessary office space, personnel and facilities necessary and incident to the
Advisor's performance of its services thereunder. The Advisor 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 Advisor or any of its
affiliates. The Advisory Agreement provides that each Fund will be reimbursed by
the Advisor, 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 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 Advisor or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.
The following table sets forth total advisory fees before waivers
and after waivers for each of the Funds for the fiscal year ended September 30,
1997:
Year Ended
September 30, 1997
---------------------------------
Advisory Fee Advisory Fee
Before Waivers After Waivers
-------------- -------------
Income Fund $33,069 $0
Growth and Income Fund 27,869 0
Growth Fund 13,262 0
Aggressive Growth Fund 11,316 0
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. The Underlying Funds have approved the
appointment of USB as a sub-administrator (the "Sub-Administrator") effective
January 1, 1998. It is contemplated that the Sub-Administrator will assist the
Administrator in the performance of administrative services for the Underlying
Funds.
<PAGE>
The following table sets forth administrative fees, paid by each of
the Funds for the fiscal year ended September 30, 1997:
Year Ended
September 30, 1997
------------------
Income Fund $44,990
Growth and Income Fund 43,464
Growth Fund 40,308
Aggressive Growth Fund 39,740
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 following table sets forth shareholder servicing fees, paid by
each of the Funds for the fiscal year ended September 30, 1997:
Year Ended
September 30, 1997
------------------
Income Fund $33,069
Growth and Income Fund 27,869
Growth Fund 13,262
Aggressive Growth Fund 11,316
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.
<PAGE>
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is U.S. Bank National Association
(the "Custodian"), U.S. Bank Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of USB.
The Custodian takes no part in determining the investment policies
of the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian. 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., 330 West Ninth Street, 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
U.S. Bank National Association (the "Advisor"), the Advisor of the
Funds, also serves as investment Advisor and manager of each of the Underlying
Funds through its First American Asset Management group. For information
concerning U.S. 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 engaged
the Advisor to act as investment Advisor for and to manage the investment of the
assets of each such Underlying Fund. Each such Underlying Fund other than
International Fund pays the Advisor monthly fees calculated on an annual basis
equal to 0.70% of its average daily net assets. International Fund pays the
Advisor 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 engaged the
Advisor to act as investment Advisor for and to manage the investment of the
assets of Prime Obligations Fund. Prime Obligations Fund pays the Advisor
monthly fees calculated on an annual basis equal to 0.40% of its average daily
net assets.
<PAGE>
The FAIF Advisory Agreement and the FAF Advisory Agreement require
the Advisor to provide FAIF and FAF with all necessary office space, personnel
and facilities necessary and incident to the Advisor's performance of its
services thereunder. The Advisor 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 the Advisor or any of its affiliates.
The FAIF Advisory Agreement and the FAF Advisory Agreement provide that each
Underlying Fund will be reimbursed by the Advisor, in an amount not in excess of
the advisory fees payable by such Underlying Fund, for excess fund expenses as
may be 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 the Advisor 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: (888)
997-8728.
SUB-ADVISORY AGREEMENTS FOR INTERNATIONAL FUND, EMERGING MARKETS FUND AND
STRATEGIC INCOME FUND
Marvin & Palmer Associates, Inc. ("Marvin & Palmer"), 1201 North
Market Street, Suite 2300, Wilmington, Delaware 19801, is sub-advisor for
International Fund and Emerging Markets Fund under an agreement with the Advisor
(the "Marvin & Palmer Sub-advisory Agreement"). Marvin & Palmer, a
privately-held company, was founded in 1986 by David F. Marvin and Stanley
Palmer. Marvin & Palmer is engaged in the management of global, non-United
States and emerging markets equity portfolios for institutional accounts. At
January 1, 1998, Marvin & Palmer managed a total of $4.6 billion in investments
for 53 institutional investors. Pursuant to the Marvin & Palmer Sub-advisory
Agreement, Marvin & Palmer is responsible for the investment and reinvestment of
International Fund's and Emerging Markets Fund's assets and the placement of
brokerage transactions in connection therewith. Under the Marvin & Palmer
Sub-advisory Agreement, Marvin & Palmer is required, among other things, to
report to the Advisor or the FAIF Board regularly at such times and in such
detail as the Advisor or the Board may from time to time request in order to
permit the Advisor and the Board to determine the adherence of International
Fund and Emerging Markets Fund to their investment objectives, policies and
restrictions. The Marvin & Palmer Sub-advisory Agreement also requires Marvin &
Palmer to provide all office space, personnel and facilities necessary and
incident to Marvin & Palmer's performance of its services under the Marvin &
Palmer Sub-advisory Agreement.
For its services to International Fund under the Marvin & Palmer
Sub-advisory Agreement, Marvin & Palmer is paid a monthly fee by the Advisor
calculated on an annual basis equal to 0.75% of the first $100 million of
International Fund's average daily net assets; 0.50% of International Fund's
average daily assets in excess of $100 million up to $300 million; 0.45% of
International Fund's average daily net assets in excess of $300 million up to
$500 million; and 0.40% of International Fund's average daily assets in excess
of $500 million.
For its services to Emerging Markets Fund under the Marvin & Palmer
Sub-advisory Agreement, Marvin & Palmer is paid a monthly fee by the Advisor
calculated on an annual basis
<PAGE>
equal to 0.85% of the first $100 million of Emerging Market Fund's average daily
net assets; 0.60% of Emerging Market Fund's average daily assets in excess of
$100 million up to $300 million; 0.55% of Emerging Market Fund's average daily
net assets in excess of $300 million up to $500 million; and 0.50% of Emerging
Market Fund's average daily assets in excess of $500 million.
Federated Investment Counseling ("Federated"), 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779 and Federated Global Research Corp., 175
Water Street, New York, New York 10038-4965 ("FGR"), each subsidiaries of
Federated Investors, Inc. ("FII"), serve as sub-advisors for Strategic Income
Fund under an agreement with the Advisor (the "Federated Sub-advisory
Agreement"). 1/ Federated, which is a Delaware business trust, and FGR, which is
a Delaware Corporation, are each registered investment advisors under the 1940
Act. As of March 31, 1998 Federated, FGR and other subsidiaries of FII rendered
investment advice regarding over $1.26 billion of assets. Pursuant to the
Federated Sub-advisory Agreement, these sub-advisors invest and reinvest a
portion of Strategic Income Fund's assets and place brokerage transactions in
connection therewith. Federated manages Strategic Income Fund's investments in
high yield domestic debt obligations, FGR manages Strategic Income Fund's
foreign investments and foreign currency transactions and the Advisor manages
Strategic Income Fund's investments in U.S. government securities and investment
grade domestic corporate debt obligations. Under the Federated Sub-advisory
Agreement, these sub-advisors are required, among other things, to report to the
Advisor or the FAIF Board regularly at such times and in such detail as the
Advisor or the Board may from time to time request in order to permit the
Advisor and the Board to determine the adherence of Strategic Income Fund to its
investment objectives, policies and restrictions. The Federated Sub-advisory
Agreement also requires these sub-advisors to provide all office space,
personnel and facilities necessary and incident to the performance of their
services under the Federated Sub-advisory Agreement.
For its services to Strategic Income Fund under the Federated
Sub-advisory Agreement, the these sub-advisors are paid a monthly fee by the
Advisor calculated on an annual basis equal to 0.20% of the first $25 million of
Emerging Market Fund's average daily net assets; 0.165% of Strategic Income
Fund's average daily assets in excess of $25 million up to $50 million; 0.13% of
Strategic Income Fund's average daily net assets in excess of $50 million up to
$100 million; and 0.105% of Strategic Income Fund's average daily assets in
excess of $100 million.
PORTFOLIO MANAGERS FOR THE UNDERLYING FUNDS
Large Cap Value Fund is managed by a committee comprised of Mr.
Doak, Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Shields, Mr. Mellum
and Mr. Dow. Equity Income Fund and Large Cap Growth Fund are managed by a
committee comprised of Mr. Dow, Ms. Shrewsbury, Mr. Markusen, Mr. Jeff Johnson,
Mr. Kelliher, Mr. Zarling, Mr. Doak, Mr. Murphy, and Mr. Glenn Johnson. Mid Cap
Value Fund is managed by a committee comprised of Mr. Shields and Mr. Lundquist.
Small Cap Growth Fund and Mid Cap Growth Fund are managed by a committee
comprised of Mr. Benson, Ms. Halbe, Ms. Hoyme, Mr. McSweeney and Ms. Thompson.
Small Cap Value Fund is managed by a committee comprised of Mr. Rose, Mr. Buss,
Mr. Hipple, Mr. Magdlen, Mr. Sabbann and Mr. Grangaard. 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."
James S. Rovner is a member of the committee which manages two of
the Underlying Funds, as set forth above. 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 two of
the Underlying Funds, as set forth above. His biography is set forth in the
Funds' Prospectus under the caption "Management -- Portfolio Management of the
Funds."
- ----------
1/ All of the Class A (voting) stock of FII is owned by a trust, the trustees of
which are John F. Donahue, Chairman and Director of FII, Mr. Donahue's wife
and Mr. Donahue's son, J. Christopher Donahue, President and Director of FII.
<PAGE>
Jeffrey A. Johnson is a member of a committee which manages two of
the Underlying Funds. Prior to joining the Advisor in 1998, he was with First
American Asset Management. Mr. Johnson received his bachelor's degree from the
University of Northern Iowa and his master's degree in economics from the
University of Iowa. He is a Chartered Financial Analyst and has 13 years of
investment industry experience.
Roland P. Whitcomb, Jr. is a member of the committees which manage
one of the Underlying Funds. Mr. Whitcomb joined the Advisor 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.
Kevin Shields is a member of the committee which manages two of the
Underlying Funds, as set forth above. Mr. Shields joined the Advisor in 1993 and
has five years of investment industry experience. Mr. Shields has analytic
responsibilities for the banking, financial services and insurance industries.
Mr. Shields received his bachelor's degree from Marquette University and his
master's degree from the Applied Security and Analysis Program at the University
of Wisconsin.
Brent Mellum is a member of the committee which manages one of the
Underlying Funds, as set forth above. Prior to joining the Advisor in 1998, he
was a credit analyst at Piper Capital Management Incorporated. Mr. Mellum
received his bachelor's degree from the University of Texas. He is a Chartered
Financial Analyst and has four years of investment industry experience.
Evan C. Lundquist is a member of the committee which manages one of
the Underlying Funds, as set forth above. Mr. Lundquist joined the Advisor in
1993 and has four years of investment industry experience. Mr. Lundquist
received his bachelor's degree from St. Mary's College.
Adam Benson is a member of the committee which manages two of the
Underlying Funds. Prior to joining the Advisor in 1998, Mr. Benson was with
Piper Capital Management Incorporated. Mr. Benson received his bachelor's degree
from Luther College and a master's degree in business administration from the
University of Minnesota.
Joyce Halbe is a member of the committee which manages two of the
Underlying Funds. Prior to joining the Advisor in 1998, Ms. Halbe was with Piper
Capital Management Incorporated. Ms. Halbe received her bachelor's degree from
Gustavus Adolphus College and a master's degree in business administration from
the University of Wisconsin. She is a Chartered Financial Analyst and has 13
years of investment industry experience.
Mary Hoyme is a member of the committee which manages two of the
Underlying Funds. Prior to joining the Advisor in 1998, Ms. Hoyme was with Piper
Capital Management Incorporated. She received her bachelor's degree from the
University of Wisconsin and her master's degree in business administration from
the University of St. Thomas. She is a Charter Financial Analyst and has 15 year
of investment industry experience.
Timothy McSweeney is a member of the committee which manages two of
the Underlying Funds. Prior to joining the Advisor in 1998, Mr. McSweeney was
with Piper Capital Management Incorporate and Gintel Asset Management. He
received his bachelor's degree from Clark University and his master's in
business administration from Northeastern University. He has four years of
investment industry experience.
Jill Thompson is a member of the committee which manages two of the
Underlying Funds. Prior to joining the Advisor in 1998, Ms. Thompson was with
Piper Capital Management Incorporated and Piper Jaffray, Inc. She received her
bachelor's degree from St. Cloud State University. She is Chartered Financial
Analyst and has nine years of investment industry experience.
Douglas K. Rose is a member of the committee which manages one of
the Underlying Funds, as set forth above. Mr. Rose joined the Advisor in 1996
and has ten years of investment industry experience. Mr. Rose has analytic
responsibilities for the business services, environmental services, leisure and
restaurant/lodging industries. He holds a bachelor's degree from the University
of Nebraska, and master's degree in business administration from the University
of Minnesota. He is a member of the Twin Cities Society of Security Analysts and
is a Chartered Financial Analyst.
Robert L. Buss is a member of the committee which manages one of the
Underlying Funds, as set forth above. Mr. Buss joined the Advisor in 1989 and
has nine years of investment industry experience. In 1996, Mr. Buss began
analytical work in the equity research area covering electric equipment,
machinery and diversified manufacturing. He holds a bachelor's degree in
Economics from the University of Minnesota.
Anthony W. Hipple is a member of the committee which manages one of
the Underlying Funds, as set forth above. Mr. Hipple is primarily responsible
for portfolio analytics and screening. Mr. Hipple joined the Advisor in 1996 and
has four years of investment industry experience. He holds a bachelor's degree
from the University of Northern Iowa and a master's degree in business
administration from the University of Iowa.
Frank G. Magdlen is a member of the committee which manages one of
the Underlying Funds, as set forth above. He joined the Advisor in 1979 and has
24 years of investment industry experience. Prior to joining the Advisor, he was
with First Interstate and Farmers Group. Mr. Magdlen received his bachelor's
degree from the University of Portland and his master's degree in business
administration from the University of Southern California. He is a Chartered
Financial Analyst and past president of the Portland Society of Financial
Analysts.
Michael K. Sabbann is a member of the committee which manages one of
the Underlying Funds, as set forth above. He joined the Advisor in 1998 and has
over ten years of investment industry experience. Prior to joining the Advisor,
he was a research analyst with Piper Jaffray Companies. Mr. Sabbann received
his bachelor's degree and his master's degree in business administration from
the University of Minnesota. He is a Chartered Financial Analyst.
<PAGE>
John D. Grangaard is a member of the committee which manages one of
the Underlying Funds, as set forth above. He joined the Advisor in 1998 and has
18 years of investment industry experience. Prior to joining the Advisor, he was
a senior analyst with G.S. Squared Securities, Inc. He received his bachelor's
degree from Yale University, his master's degree in business administration from
the University of Minnesota and his juris doctor degree from the University of
North Dakota.
Sandra Shrewsbury is a member of the committee which manages four of
the Underlying Fund, as set forth above. She joined the Advisor in 1998. Prior
to joining the Advisor, she was with Piper Jaffray, Inc. She received her
bachelor's degree from Nebraska Wesleyan University and a master's degree in
business administration from Iowa State University. She is a Chartered Financial
Analyst and has 11 years of investment industry experience.
Glenn E. Johnson is a member of the committee which manages two of
the Underlying Funds. He joined the Advisor in 1989 and has 13 years of
investment industry experience. Prior to joining the Advisor, he was an analyst
with Piper Jaffray Inc. Mr. Johnson received his bachelor's degree and his
master's degree in business administration from the University of Minnesota and
is a Chartered Financial Analyst.
Steven B. Markusen is a member of the committee which manages two of
the Underlying Funds, as set forth above. He joined the Advisor in 1998. Prior
to joining the Advisor, he was with Piper Capital Management Incorporated and
Investment Advisors Inc. Mr. Markusen received his bachelor's degree from
Colorado State University and his master's degree in business administration
from the University of Denver. He is a Chartered Financial Analyst.
Mark P. Kelliher is a member of the committee which manages two of
the Underlying Funds. Prior to joining the Advisor in 1998, he was with First
American Asset Management and Principal Financial Securities. Mr. Kelliher
received his bachelor's degree from the University of Minnesota and a master's
degree in business administration from the University of St. Thomas.
Daniel W. Zarling is a member of the committee which manages two of
the Underlying Funds. He joined the Advisor in 1996 and has six years of
investment industry experience. Prior to joining the Advisor, he was an
investment analyst at American Express Financial Advisors. Mr. Zarling received
his bachelor's degree from the University of Minnesota and a master's degree in
business administration from the University of Chicago. He is a Chartered
Financial Analyst.
David Johnson is a co-manager of Real Estate Securities Fund. He
joined the Advisor in 1997 and has four years of investment industry experience.
He has analytic responsibilities for REITs, business services, printing and
publishing, and advertising. Prior to joining the Advisor, he was with the State
of Wisconsin Investment Board. He received his bachelor's degree from St.
Lawrence University and his master's degree in business administration from the
University of Connecticut.
Paul A. Bow is a member of the committee which manages one of the
Underlying Funds. His biography is set forth in the Fund's Prospectus under the
caption "Management -- Portfolio Management of the Funds."
Martin L. Jones is a member of the committee which manages one of
the Underlying Funds. His biography is set forth in the Fund's Prospectus under
the caption "Management -- Portfolio Management of the Funds."
Lucille C. Rehkamp is a member of the committee which manages one
of the Underlying Funds. Her biography is set forth in the Fund's Prospectus
under the caption "Management -- Portfolio Management of the Funds."
Mark M. Green is a member of the committee which manages one of
the Underlying Funds. His biography is set forth in the Fund's Prospectus under
the caption "Management -- Portfolio Management of the Funds."
Bruce Salvog is a member of the committee which manages one of the
Underlying Funds. His biography is set forth in the Fund's Prospectus under the
caption "Management -- Portfolio Management of the Funds."
David Steele is a member of the committee which manages one of the
Underlying Funds. His biography is set forth in the Fund's 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. Mr.
Palmer joined the Advisor in 1992 and has over seven years of investment
industry experience. Prior to joining the Advisor, Mr. Palmer was a securities
lending trader and senior master trust accountant with U.S. Bank Trust National
Association. He received his bachelor's degree from the University of Wisconsin
- -- LaCrosse and his master's degree in business administration from the
University of Minnesota.
A committee comprised of the following seven individuals shares the
management of International Fund and Emerging Markets Fund on behalf of its
sub-advisor:
David F. Marvin is Chairman of Marvin & Palmer and founded the firm
together with Mr. Palmer in 1986. Before founding Marvin & Palmer, Mr. Marvin
was Vice President in charge of DuPont 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
<PAGE>
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 Vice-Chairman and President of Marvin & Palmer 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.
Terry B. Mason is a Senior Vice President and portfolio manager of
Marvin & Palmer. Before joining Marvin & Palmer, 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 Senior Vice President and portfolio manager
for Marvin & Palmer and joined the firm in 1989. He received his bachelor's
degree from Wesleyan University.
Todd D. Marvin is a Senior Vice President and portfolio manager for
Marvin & Palmer and joined the firm in 1991. Before joining Marvin & Palmer, 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 Marvin
& Palmer. Before becoming a Portfolio Manager, Mr. Schaen was Head Trader for
Marvin & Palmer from 1991 to 1994 and an International Analyst for Marvin &
Palmer 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.
Stephen D. Marvin is a Vice President and portfolio manager for
Marvin & Palmer and joined Marvin & Palmer in 1994. Before joining Marvin &
Palmer, Mr. Marvin was employed by Bear, Stearns & Company as a corporate
financial analyst. Mr. Marvin received his bachelor's degree from Carleton
College.
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 Advisor. 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
Advisor may, however, select a broker or dealer to effect a particular
transaction without communicating with all brokers or dealers who might be able
to effect such transaction because of the volatility of the market and the
desire of the Advisor 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
<PAGE>
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 Advisor 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 Advisor 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 Advisor 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 Advisor.
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 Advisor 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 Advisor to supplement its own investment
research activities and enable the Advisor 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 Advisor
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 Advisor 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 Advisor in performing services for the Funds. The Advisor
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 Advisor 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 Advisor, except as noted below.
The Advisor 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 Advisor with
research services, which the Advisor 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 Advisor 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 Advisor determined in good faith
that the amount of such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
the Advisor 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 Advisor 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
<PAGE>
unfair or unreasonable to the shareholders of the Funds, as determined by the
Board of Directors. Any transactions with an affiliated broker or dealer must be
on terms that are both at least as favorable to the Funds as the Funds can
obtain elsewhere and at least as favorable as such affiliated broker or dealer
normally gives to others.
When two or more clients of the Advisor are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts are
allocated in accordance with a formula considered by the Advisor to be equitable
to each client. In some cases, this system could have a detrimental effect on
the price or volume of the security as far as each client is concerned. In other
cases, however, the ability of the clients to participate in volume transactions
may produce better executions for each client.
The 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:
(888) 997-8728.
CAPITAL STOCK
As of December 1, 1997, the directors of FASF owned shares of FAIF,
FASF and FAF with an aggregate net asset value of $3,596,000. As of January 14,
1998, 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.
PERCENTAGE OF
SHARES OWNED
------------
INCOME FUND
NFSC FEBO # BJF-001643....................................... 7.99%
Fleet Wholesale Supply Co.
Etal Retirement Plans
c/o Tom Green
P.O. Box 5055
Brainerd, MN 56401-5055
U.S. Bank National Association............................... 7.38%
As Fiduciary For First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
VAR & Co..................................................... 7.38%
P.O. Box 64482
St. Paul, MN 55164-0482
Unit & Co.................................................... 7.32%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
GROWTH AND INCOME FUND
Unit & Co.................................................... 25.72%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
<PAGE>
VAR & Co..................................................... 20.27%
P.O. Box 64482
St. Paul, MN 55164-0482
Telco........................................................ 15.14%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
Wachovia Bank NA............................................. 13.86%
Trust US Bancorp Deferred Comp. Trust
DTD 8/1/97
P.O. Box 3073
Winston Salem, NC 27150
GROWTH FUND
Unit & Co.................................................... 19.50%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
VAR & Co..................................................... 8.94%
P.O. Box 64482
St. Paul, MN 55164-0482
AGGRESSIVE GROWTH FUND
Unit & Co.................................................... 39.22%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
VAR & Co..................................................... 12.33%
P.O. Box 64482
St. Paul, MN 55164-0482
U.S. Bank National Association............................... 6.84%
As Fiduciary For First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631
<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") and federally-chartered
banks are open for business. The NYSE is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday (observed),
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Each year the NYSE may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future.
Net
Asset Value
Net Assets Shares Per Share
(In Dollars) / Outstanding = (In Dollars)
------------ ----------- ------------
Income Fund $36,118,011 $3,337,762 $10.82
Growth and Income Fund 27,565,392 2,343,810 11.76
Growth Fund 15,675,513 1,293,419 12.12
Aggressive Growth Fund 13,724,705 1,909,679 12.58
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.
Based upon the 30-day period ended September 30, 1997, the yields
for the shares of the Funds were as follows:
Income Fund 4.18%
Growth and Income Fund 2.21
Growth Fund 1.34
Aggressive Growth Fund 0.65
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
<PAGE>
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:
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.
Based on the foregoing, the average annual and cumulative total
returns for the shares of the Funds were as follows:
Average Annual
Cumulative Since One Five
Since Inception* Inception Year Years
---------------- --------- ---- -----
Income Fund 12.51% 12.51% ** **
Growth and Income Fund 20.47 20.47 ** **
Growth Fund 23.23 23.23 ** **
Aggressive Growth Fund 27.06 27.06 ** **
* Inception date of October 1, 1996.
** Not in operation for the entire period.
<PAGE>
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. For
the one year period ended September 30, 1997, the historical distribution rates
of the shares of the Funds were as follows:
Income Fund 3.75%
Growth and Income Fund 2.21
Growth Fund 1.47
Aggressive Growth Fund 0.85
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. The annualized current distribution rates for the one
month period ended September 30, 1997 for the funds were as follows:
Income Fund 4.57%
Growth and Income Fund 2.43
Growth Fund 1.23
Aggressive Growth Fund 0.46
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.
RUSSELL MID-CAP INDEX is an index that measures the performance of
the 800 smallest companies in the Russell 1000 Index, which represents
approximately 35% of the total market capitalization of the Russell 1000 Index.
LIPPER BALANCED FUNDS 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 FUNDS 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 INTERNATIONAL FUNDS AVERAGE is an average of funds which
invest primarily in equity securities whose primary trading markets are outside
the United States.
<PAGE>
LIPPER GENERAL EQUITY FUNDS 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.
LIPPER GENERAL BOND FUNDS AVERAGE is an average of funds which
invest primarily in corporate and government debt issues without quality or
maturity restrictions.
LIPPER INCOME FUNDS AVERAGE is an average of funds which normally
seek a high level of current income through investing in income producing
stocks, bonds and money market instruments.
LIPPER GROWTH & INCOME FUNDS AVERAGE is an average of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends.
LIPPER MONEY MARKET INSTRUMENT FUNDS AVERAGE is an average of money
market funds which invest in high financial instruments rated in the top two
grades.
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.
SALOMON BROTHERS 3-MONTH U.S. TREASURY BILL INDEX represents monthly
return equivalents of yield averages which are not marked to market.
WILSHIRE 5000 EQUITY INDEX measures the performance of all United
States headquartered equity securities with readily available price data and is
adjusted using over 7,000 capitalization weighted security returns.
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; and (3) diversify its holdings so
that, at the end of each fiscal quarter of the Fund, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government 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
<PAGE>
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, 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
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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
AAA: Securities rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only to
a small degree.
A: Securities rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions
than bonds in higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Although such
securities normally exhibit adequate protection standards, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for
securities in this category than for those in higher rated
categories.
Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Securities rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Securities rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Securities rated CCC have a currently identifiable
vulnerability to default, and are dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to
have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
MOODY'S
Aaa: Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal is
secure.
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While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise what
are generally known as high grade securities. They are rated lower
than the best securities because margins of protection may not be as
large as in Aaa securities, or fluctuation of protective elements
may be of greater magnitude, or there may be other elements present
which make the long-term risks appear somewhat greater than in Aaa
securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.
Ba: An issue which is rated Ba is judged to have speculative
elements; its future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes issues in this
class.
B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa: An issue which is rated Caa is of poor standing. Such an issue
may be in default or there may be present elements of danger with
respect to principal or interest.
Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality, and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S. 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.
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BBB: An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the category.
MOODY'S. Moody's ratings for preferred stock include the following:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a: An issue which is rated "a" is considered to be an upper medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over
any great length of time.
RATINGS OF COMMERCIAL PAPER
STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds or the
Underlying Funds will purchase commercial paper rated A-3 or lower.
MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
and it does not represent that any specific instrument is a valid obligation of
a rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment.
PRIME-2: Strong capacity for repayment.
PRIME-3: Acceptable capacity for repayment.
None of the Funds 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
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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 financial statements of FASF included in its annual report to
shareholders dated September 30, 1997 are incorporated herein by reference. Such
annual report to shareholders accompanies this Statement of Additional
Information.