FIRST AMERICAN STRATEGY FUNDS, INC.
...............................
1998 SEMI ANNUAL REPORT
[GRAPHIC]
THE POWER OF DISCIPLINED INVESTING
<PAGE>
TABLE OF CONTENTS
March 31, 1998
Message To Shareholders..................................................Page 1
Economic and Investment Review...........................................Page 2
Statements of Net Assets.................................................Page 7
Statements of Operations.................................................Page 11
Statements of Changes in Net Assets......................................Page 12
Financial Highlights.....................................................Page 14
Notes to Financial Statements............................................Page 16
Notice to Shareholders...................................................Page 21
<PAGE>
1
MESSAGE TO SHAREHOLDERS
March 31, 1998
Dear Fellow Shareholder:
On behalf of the Board of Directors of First American Funds, I am pleased to
report to you that we have experienced solid investment performance and asset
growth in keeping with the ongoing strength of the economy and overall positive
market conditions. As of March 31, 1998, total assets in the First American
Strategy Funds had surpassed $444 million, up from $93 million just six months
ago. This growth has not come at the expense of quality. First American Funds
are on track to continue to produce competitive investment results for our
shareholders.
The Fund's Board of Directors recently approved a recommendation to change
the name of four of the underlying portfolios of the First American Funds in
which Strategy Funds may invest. These name changes will not affect the fund's
objectives and will result in fund names which are more reflective of their
investment style. The name changes will be effective on May 29, 1998. The chart
below shows which funds are changing names.
CURRENT NAME NEW NAME
Stock Fund Large Cap Value Fund
Special Equity Fund Mid Cap Value Fund
Diversified Growth Fund Large Cap Growth Fund
Emerging Growth Fund Small Cap Growth Fund
In November, 1997, we introduced the First American Small Cap Value Fund,
which is currently a component in three of the four First American Strategy
Funds.
Later this year we will be introducing six new funds to the First American
Funds family. Two tax free bond funds: Tax Free and Minnesota Tax Free, will
have longer maturities than the current tax free fund offerings. An additional
bond fund, Adjustable Rate Mortgage Securities, will also be introduced. The new
First American Strategic Income Fund will invest in three distinct bond sectors,
domestic investment grade, international, and high yield corporates. Two new
equity funds, a Mid Cap Growth Fund and an Emerging Markets Fund, will also be
offered. If you have questions on these new funds, please contact your
investment advisor.
On the following pages is an economic and investment review which will
provide you with a complete analysis of the stock and bond markets. The final
section of this report highlights the financial statements for each First
American Strategy Fund.
The Board of Directors thanks you for your continued support and confidence
in First American Funds. We are confident that the Funds' tradition of
conservative management, competitive results and innovative products will
continue to serve you well.
Sincerely,
/s/ Virginia L. Stringer
Virginia L. Stringer
Chairman
First American Strategy Funds, Inc.
<PAGE>
2
ECONOMIC AND INVESTMENT REVIEW
March 31, 1998
STRONG DOMESTIC ECONOMY
One of the major investment themes developing so far this year is the ongoing
strength of the domestic economy and financial markets. Indeed, far from the
slowdown that was widely expected at the end of 1997, business activity
accelerated during the first quarter, while interest rates continued to decline.
This combination, in turn, has improved the earnings outlook and market
valuations for many companies and helped push the major stock market indices to
new records. Although the pace of growth during the first quarter is not likely
to be sustained throughout the year, if the first three months are any guide,
1998 should be another remarkable year for U.S. investors.
As the U.S. economy enters its eighth consecutive year of expansion, these
are truly extraordinary times. Never before has the domestic economy been on
such a sound footing this late in the business cycle. Few, if any, of the
typical imbalances that bring such cycles to an end are currently
present--inventories are at reasonable levels, inflation remains well contained,
household finances and corporate balance sheets are healthy, and there have been
no "supply shocks" or production bottlenecks to disrupt the flow of goods and
services. Although the economic crisis in Asia is a serious concern, and will
likely slow the pace of growth in the U.S. later this year, there is every
reason to believe the domestic economy will continue to grow and that this will
become the longest peacetime expansion on record.
The consumer sector, which accounts for fully two-thirds of the total
economy, continues to benefit from a combination of factors, including a tight
labor market, low inflation and declining interest rates. Consumers are very
optimistic in their outlook and are spending money on everything from cars and
appliances to mutual funds.
<PAGE>
3
ECONOMIC AND INVESTMENT REVIEW
March 31, 1998
[PLOT POINTS GRAPH]
Line graph depicting the U.S. unemployment rate.
U.S. UNEMPLOYMENT RATE
PERCENT
JAN-90 5.40 JAN-94 6.60
FEB-90 5.30 FEB-94 6.60
MAR-90 5.20 MAR-94 6.50
APR-90 5.40 APR-94 6.40
MAY-90 5.40 MAY-94 6.00
JUN-90 5.20 JUN-94 6.10
JUL-90 5.50 JUL-94 6.10
AUG-90 5.70 AUG-94 6.10
SEP-90 5.90 SEP-94 5.90
OCT-90 5.90 OCT-94 5.80
NOV-90 6.20 NOV-94 5.60
DEC-90 6.30 DEC-94 5.40
JAN-91 6.40 JAN-95 5.60
FEB-91 6.60 FEB-95 5.40
MAR-91 6.80 MAR-95 5.40
APR-91 6.70 APR-95 5.70
MAY-91 6.90 MAY-95 5.60
JUN-91 6.90 JUN-95 5.60
JUL-91 6.80 JUL-95 5.70
AUG-91 6.90 AUG-95 5.70
SEP-91 6.90 SEP-95 5.70
OCT-91 7.00 OCT-95 5.60
NOV-91 7.00 NOV-95 5.60
DEC-91 7.30 DEC-95 5.60
JAN-92 7.30 JAN-96 5.70
FEB-92 7.40 FEB-96 5.50
MAR-92 7.40 MAR-96 5.50
APR-92 7.40 APR-96 5.50
MAY-92 7.60 MAY-96 5.50
JUN-92 7.80 JUN-96 5.30
JUL-92 7.70 JUL-96 5.50
AUG-92 7.60 AUG-96 5.20
SEP-92 7.60 SEP-96 5.20
OCT-92 7.30 OCT-96 5.30
NOV-92 7.40 NOV-96 5.40
DEC-92 7.40 DEC-96 5.30
JAN-93 7.30 JAN-97 5.30
FEB-93 7.10 FEB-97 5.30
MAR-93 7.00 MAR-97 5.20
APR-93 7.10 APR-97 5.00
MAY-93 7.10 MAY-97 4.80
JUN-93 7.00 JUN-97 5.00
JUL-93 6.90 JUL-97 4.90
AUG-93 6.80 AUG-97 4.90
SEP-93 6.70 SEP-97 4.90
OCT-93 6.80 OCT-97 4.80
NOV-93 6.60 NOV-97 4.60
DEC-93 6.50 DEC-97 4.70
JAN-98 4.70
FEB-98 4.60
MAR-98 4.70
Capital investment also continues at a rapid pace, as companies look for new
ways to increase efficiency. Strong growth in labor productivity over recent
years has been an important element in sustaining the economic expansion, by
allowing wages to rise without increasing overall production costs and, thereby,
keeping inflation low. The capital spending boom is likely to slow somewhat in
the months ahead, but will continue to be a source of growth for the overall
economy.
<PAGE>
4
ECONOMIC AND INVESTMENT REVIEW
March 31, 1998
INFLATION
Inflation--or really the lack of it--is another key element in the outlook
for the economy and financial markets. The slowdown in inflation over the past
several quarters has been driven primarily by three factors: strong growth in
labor productivity, reflecting the rapid pace of technological change and
capital investment in the U.S.; intense international competition and the
expansion of global trade, which limits "pricing power" for both domestic and
foreign producers; and steep declines in world prices for most industrial and
agricultural commodities.
[PLOT POINTS GRAPH]
Line graph depicting the Consumer Price Index on
a "year ago percentage change" basis.
CONSUMER PRICE INDEX
YEAR-AGO PERCENT CHANGE
JAN-90 5.19 JAN-94 2.52
FEB-90 5.26 FEB-94 2.44
MAR-90 5.15 MAR-94 2.58
APR-90 4.71 APR-94 2.36
MAY-90 4.36 MAY-94 2.29
JUN-90 4.75 JUN-94 2.56
JUL-90 4.82 JUL-94 2.70
AUG-90 5.70 AUG-94 2.97
SEP-90 6.16 SEP-94 2.96
OCT-90 6.37 OCT-94 2.68
NOV-90 6.27 NOV-94 2.74
DEC-90 6.25 DEC-94 2.60
JAN-91 5.64 JAN-95 2.87
FEB-91 5.31 FEB-95 2.86
MAR-91 4.90 MAR-95 2.79
APR-91 4.81 APR-95 3.05
MAY-91 5.03 MAY-95 3.12
JUN-91 4.69 JUN-95 2.97
JUL-91 4.36 JUL-95 2.83
AUG-91 3.80 AUG-95 2.55
SEP-91 3.39 SEP-95 2.54
OCT-91 2.85 OCT-95 2.74
NOV-91 3.06 NOV-95 2.60
DEC-91 2.98 DEC-95 2.60
JAN-92 2.67 JAN-96 2.72
FEB-92 2.82 FEB-96 2.72
MAR-92 3.19 MAR-96 2.91
APR-92 3.18 APR-96 2.90
MAY-92 3.02 MAY-96 2.89
JUN-92 3.01 JUN-96 2.82
JUL-92 3.15 JUL-96 2.95
AUG-92 3.07 AUG-96 2.88
SEP-92 2.99 SEP-96 3.00
OCT-92 3.28 OCT-96 2.99
NOV-92 3.12 NOV-96 3.18
DEC-92 2.96 DEC-96 3.31
JAN-93 3.18 JAN-97 3.04
FEB-93 3.24 FEB-97 3.03
MAR-93 3.02 MAR-97 2.70
APR-93 3.15 APR-97 2.43
MAY-93 3.22 MAY-97 2.23
JUN-93 3.00 JUN-97 2.30
JUL-93 2.84 JUL-97 2.16
AUG-93 2.84 AUG-97 2.22
SEP-93 2.76 SEP-97 2.22
OCT-93 2.75 OCT-97 2.08
NOV-93 2.67 NOV-97 1.89
DEC-93 2.81 DEC-97 1.70
JAN-98 1.57
FEB-98 1.44
MAR-98 1.38
We believe that the overall trend of "disinflation" in consumer prices should
continue in the months ahead, even though the rate of productivity growth may
slow and the decline in world commodity prices may already be leveling off. The
strong U.S. dollar will keep import prices low, and any slowdown in domestic
demand will further limit pricing power for most companies. In fact, the spread
of deflation from the producer to the consumer level may pose a larger threat to
the overall outlook than the possibility of rising prices. To be sure, if the
U.S. economy slows more dramatically than expected, price cuts will be seen for
a wide variety of goods and services, putting even more pressure on profit
margins for many companies.
<PAGE>
5
ECONOMIC AND INVESTMENT REVIEW
March 31, 1998
THE BOND MARKET
The bond market rally continued during the first weeks of 1998, which brought
some long-term interest rates near their historic lows. As the first quarter
progressed, however, bond yields drifted higher and finished the quarter at
roughly the same level as at the end of last year.
Long-term interest rates should continue to decline if, as expected, the pace
of growth weakens and inflation continues to slow in the months ahead. As long
as the Federal Reserve keeps monetary policy on hold, however, short-term
interest rates will remain near their current levels. Under this scenario, it is
possible that the yield curve could invert temporarily in the weeks or months
ahead, with long-term interest rates falling below the level of short-term
rates. If this scenario does unfold, the Fed would likely ease policy fairly
quickly; thus, sending short-term rates lower and allowing the yield curve to
resume its more normal positive slope.
Capital investment also continues at a rapid pace, as companies look for new
ways to increase efficiency. Strong growth in labor productivity over recent
years has been an important element in sustaining the economic expansion, by
allowing wages to rise without increasing overall production costs and, thereby,
keeping inflation low. The capital spending boom is likely to slow somewhat in
the months ahead, but will continue to be a source of growth for the overall
economy.
THE STOCK MARKET
As the current U.S. economic expansion enters its eighth year, the trend in
domestic stock prices remains positive, although occasionally volatile. All
major domestic indices experienced double-digit gains during the first quarter
of 1998, with larger growth companies leading the way. This advance leaves large
segments of the market, including many blue chips, fully valued or overvalued
and therefore vulnerable to correction. A correction could occur in response to
bad news, the most likely source of which is probably weak corporate earnings.
<PAGE>
6
ECONOMIC AND INVESTMENT REVIEW
March 31, 1998
However, because we are unable to forecast the end of the expansion, and
because the environment for equities remains generally favorable, we expect the
long-term positive trend to remain intact. Outside the U.S., European stocks are
making impressive gains this year amid continuing economic recovery and
corporate restructuring. The Asian Pacific markets are mixed, with some enjoying
a rebound and others still reflecting significant investor concern.
We are pleased to fulfill your unique investment needs through the distinct
investment disciplines represented by the First American Funds. Our twin focus
on competitive investment return and control of risk will help you achieve your
long term investment goals. We appreciate your confidence and look forward to
serving you in the coming year.
Sincerely,
/s/ John M. Murphy, Jr.
John M. Murphy, Jr.
Chairman and Chief Investment Officer
First American Asset Management
<PAGE>
7
STATEMENTS OF NET ASSETS
March 31, 1998
Unaudited
INCOME FUND
<TABLE>
<CAPTION>
DESCRIPTION SHARES VALUE (000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME FUND - 68.7%
First American Investment Funds, Inc.
Fixed Income Fund 5,459,949 $60,714
-------
TOTAL FIXED INCOME FUND
Cost ($60,288) 60,714
=======
EQUITY FUNDS - 24.5%
First American Investment Funds, Inc.
Equity Income Fund 1,077,023 18,137
Real Estate Securities Fund 244,527 3,568
-------
TOTAL EQUITY FUNDS
Cost ($20,275) 21,705
=======
MONEY MARKET FUND - 5.3%
First American Funds, Inc.
Prime Obligations Fund 4,654,530 4,655
-------
TOTAL MONEY MARKET FUND
Cost ($4,655) 4,655
=======
TOTAL INVESTMENTS - 98.5%
Cost ($85,218) 87,074
=======
Other Assets and Liabilities, Net - 1.5% 1,303
-------
NET ASSETS:
Portfolio shares - ($.01 par value - 20 billion authorized)
based on 7,868,405 outstanding shares $84,443
Undistributed net investment income 47
Accumulated net realized gain on investments 2,031
Net unrealized appreciation of investments 1,856
-------
TOTAL NET ASSETS - 100.0% $88,377
=======
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER SHARE $ 11.23
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
8
STATEMENTS OF NET ASSETS
March 31, 1998
Unaudited
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
DESCRIPTION SHARES VALUE (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY FUNDS - 50.3%
First American Investment Funds, Inc.
Large Cap Growth Fund 1,371,322 $25,013
Small Cap Growth Fund* 683,702 11,657
International Fund 760,073 10,291
Real Estate Securities Fund 714,159 10,420
Mid Cap Value Fund 888,555 20,570
Large Cap Value Fund 930,519 24,984
Small Cap Value Fund 631,692 11,465
--------
TOTAL EQUITY FUNDS
Cost ($106,067) 114,400
========
FIXED INCOME FUND - 44.6%
First American Investment Funds, Inc.
Fixed Income Fund 9,116,242 101,373
--------
TOTAL FIXED INCOME FUND
Cost ($100,147) 101,373
========
MONEY MARKET FUND - 5.0%
First American Funds, Inc.
Prime Obligations Fund 11,372,034 11,372
--------
TOTAL MONEY MARKET FUND
Cost ($11,372) 11,372
========
TOTAL INVESTMENTS - 99.9%
Cost ($217,586) 227,145
========
Other Assets and Liabilities, Net - 0.1% 147
--------
NET ASSETS:
Portfolio shares - ($.01 par value - 20 billion authorized)
based on 18,626,209 outstanding shares $207,816
Undistributed net investment income 136
Accumulated net realized gain on investments 9,781
Net unrealized appreciation of investments 9,559
--------
TOTAL NET ASSETS -- 100.0% $227,292
========
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER SHARE $ 12.20
========
</TABLE>
*Currently non-income producing security.
The accompanying notes are an integral part of the financial statements.
<PAGE>
9
STATEMENTS OF NET ASSETS
March 31, 1998
Unaudited
GROWTH FUND
<TABLE>
<CAPTION>
DESCRIPTION SHARES VALUE (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY FUNDS - 65.0%
First American Investment Funds, Inc.
Large Cap Growth Fund 385,887 $7,038
Small Cap Growth Fund* 400,182 6,823
International Fund 410,254 5,555
Mid Cap Value Fund 287,935 6,666
Large Cap Value Fund 260,223 6,987
Small Cap Value Fund 374,652 6,800
-------
TOTAL EQUITY FUNDS
Cost ($36,912) 39,869
=======
FIXED INCOME FUND - 29.7%
First American Investment Funds, Inc.
Fixed Income Fund 1,641,849 18,257
-------
TOTAL FIXED INCOME FUND
Cost ($18,139) 18,257
=======
MONEY MARKET FUND - 5.2%
First American Funds, Inc.
Prime Obligations Fund 3,185,762 3,186
-------
TOTAL MONEY MARKET FUND
Cost ($3,186) 3,186
=======
TOTAL INVESTMENTS - 99.9%
Cost ($58,237) 61,312
=======
Other Assets and Liabilities, Net - 0.1% 57
-------
NET ASSETS:
Portfolio shares - ($.01 par value - 20 billion authorized)
based on 4,834,343 outstanding shares $54,931
Distribution in excess of net investment income 2
Accumulated net realized gain on investments 3,361
Net unrealized appreciation of investments 3,075
-------
TOTAL NET ASSETS - 100.0% $61,369
=======
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION
PRICE PER SHARE $ 12.69
=======
</TABLE>
*Currently non-income producing security.
The accompanying notes are an integral part of the financial statements.
<PAGE>
10
STATEMENTS OF NET ASSETS
March 31, 1998
Unaudited
AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
DESCRIPTION SHARES VALUE (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY FUNDS - 80.1%
First American Investment Funds, Inc.
Large Cap Growth Fund 430,965 $ 7,861
Small Cap Growth Fund* 445,486 7,596
Health Sciences Fund 261,871 2,985
International Fund 583,550 7,901
Mid Cap Value Fund 337,234 7,807
Large Cap Value Fund 291,512 7,827
Technology Fund* 154,518 2,970
Small Cap Value Fund 417,019 7,569
-------
TOTAL EQUITY FUNDS
Cost ($48,789) 52,516
=======
FIXED INCOME FUND - 15.0%
First American Investment Funds, Inc.
Fixed Income Fund 892,454 9,813
-------
TOTAL FIXED INCOME FUND
Cost ($9,831) 9,813
=======
MONEY MARKET FUND - 5.0%
First American Funds, Inc.
Prime Obligations Fund 3,302,963 3,303
-------
TOTAL MONEY MARKET FUND
Cost ($3,303) 3,303
=======
TOTAL INVESTMENTS - 100.1%
Cost ($61,923) 65,632
=======
Other Assets and Liabilities, Net - (0.1)% (65)
-------
NET ASSETS:
Portfolio shares - ($.01 par value - 20 billion authorized)
based on 4,933,354 outstanding shares $58,144
Undistributed net investment income 1
Accumulated net realized gain on investments 3,713
Net unrealized appreciation of investments 3,709
-------
TOTAL NET ASSETS - 100.0% $65,567
=======
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER SHARE $ 13.29
=======
</TABLE>
*Currently non-income producing security.
The accompanying notes are an integral part of the financial statements.
<PAGE>
11
STATEMENTS OF OPERATIONS
For the six month period ended March 31, 1998
Unaudited
<TABLE>
<CAPTION>
GROWTH
AND AGGRESSIVE
INCOME INCOME GROWTH GROWTH
FUND FUND FUND FUND
......... .......... ......... ...........
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income distributions from underlying funds $1,560 $ 2,745 $ 645 $ 557
====== ======= ====== ======
Total investment income 1,560 2,745 645 557
====== ======= ====== ======
EXPENSES:
Investment advisory fees 80 194 53 55
Less: Waiver of investment advisory fees (80) (94) (53) (55)
Less: Reimbursement of expenses by adviser (108) (327) (73) (74)
Shareholder servicing fee 80 194 53 55
Administrator fees 35 86 24 24
Transfer agent fees 13 14 12 10
Amortization of organizational costs 2 2 2 2
Custodian fees 10 23 6 7
Directors' fees -- -- -- --
Registration fees 24 48 14 15
Professional fees 12 28 8 8
Printing 10 23 6 7
Other 2 4 1 1
------ ------- ------ ------
TOTAL EXPENSES AFTER WAIVERS
AND REIMBURSEMENTS 80 195 53 55
====== ======= ====== ======
Investment income - net 1,480 2,550 592 502
------ ------- ------ ------
REALIZED AND UNREALIZED GAINS
ON INVESTMENTS - NET:
Realized capital gain distributions received
from investments 949 6,699 2,429 3,047
Net realized gain on investments 1,154 3,345 1,011 661
Net change in unrealized
appreciation of investments 491 1,155 264 1,422
------ ------- ------ ------
Net gains on investments 2,594 11,199 3,704 5,130
------ ------- ------ ------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $4,074 $13,749 $4,296 $5,632
====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
12
STATEMENTS OF CHANGES IN NET ASSETS (000)
Unaudited
<TABLE>
<CAPTION>
INCOME FUND GROWTH AND INCOME FUND
....................... .......................
10/1/97 10/1/96 (2) 10/1/97 10/1/96 (2)
to to to to
3/31/98 9/30/97 3/31/98 9/30/97
------- ------------ --------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Investment income - net $ 1,480 $ 585 $ 2,550 $ 291
Realized capital gain distributions
received from investments 949 11 6,699 52
Net realized gain on investments 1,154 12 3,345 201
Net change in unrealized appreciation
of investments 491 1,025 1,155 1,980
------- ---------- --------- ----------
Net increase in net assets resulting
from operations 4,074 1,633 13,749 2,524
------- ---------- --------- ----------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Investment Income - net (1,430) (585) (2,372) (291)
Realized gain on investments (86) (2) (315) (1)
------- ---------- --------- ----------
TOTAL DISTRIBUTIONS (1,516) (587) (2,687) (292)
------- ---------- --------- ----------
CAPITAL SHARE TRANSACTIONS (1):
Proceeds from sales 58,230 43,502 74,545 33,212
Shares issued in connection with
Qualivest merger 10,015 -- 139,897 --
Reinvestment of distributions 1,382 544 2,340 269
Payments for redemptions (19,927) (8,973) (28,117) (8,148)
======= ========== ========= ==========
Increase in net assets from capital
share transactions 49,700 35,073 188,665 25,333
------- ---------- --------- ----------
TOTAL INCREASE IN NET ASSETS 52,258 36,119 199,727 27,565
NET ASSETS AT BEGINNING OF PERIOD 36,119 -- 27,565 --
======= ========== ========= ==========
NET ASSETS AT END OF PERIOD(3) $88,377 $36,119 $227,292 $27,565
======= ========== ========= ==========
(1) CAPITAL SHARE TRANSACTIONS:
Shares issued 5,295 4,152 6,403 3,057
Shares issued in connection with
Qualivest merger 918 -- 12,099 --
Shares issued in lieu
of cash distributions 125 52 202 24
Shares redeemed (1,808) (866) (2,422) (737)
======= ========== ========= ==========
NET INCREASE IN CAPITAL SHARES 4,530 3,338 16,282 2,344
======= ========== ========= ==========
</TABLE>
(2) Commenced operations on October 1, 1996.
(3) Includes undistributed net investment income (000) of $46 and $0 for Income
Fund, $136 and $0 for Growth and Income Fund, $1 and $0 for Growth Fund, and
$1 and $0 for Aggressive Growth Fund at March 31, 1998 and September 30,
1997, respectively.
The accompanying notes are an integral part of the financial statements.
<PAGE>
13
<TABLE>
<CAPTION>
GROWTH FUND AGGRESSIVE GROWTH FUND
........................ ........................
10/1/97 10/1/96 (2) 10/1/97 10/1/96 (2)
to to to to
3/31/98 9/30/97 3/31/98 9/30/97
--------- ----------- --------- -----------
<S> <C> <C> <C>
$ 592 $ 86 $ 502 $ 34
2,429 54 3,047 64
1,011 26 661 4
264 1,218 1,422 1,303
------- -------- ------- --------
4,296 1,384 5,632 1,405
------- -------- ------- --------
(582) (86) (490) (34)
(146) (1) (74) (1)
------- ---------- ------- --------
(728) (87) (564) (35)
------- --------- ------- --------
27,873 16,210 24,062 13,401
28,454 -- 32,858 --
692 83 553 33
(14,894) (1,914) (10,699) (1,079)
======= ========= ======= ========
42,125 14,379 46,774 12,355
------- --------- ------- --------
45,693 15,676 51,842 13,725
15,676 -- 13,725 --
======= ========= ======= ========
$61,369 $15,676 $65,567 $13,725
======= ========= ======= ========
2,337 1,462 1,967 1,188
2,408 -- 2,705 --
59 7 46 3
(1,263) (176) (876) (100)
======= ========= ======= ========
3,541 1,293 3,842 1,091
======= ========= ======= ========
</TABLE>
<PAGE>
14
FINANCIAL HIGHLIGHTS
For the six months ended March 31, 1998 (unaudited)
and the period ended September 30, 1997.
For a share outstanding throughout the period
<TABLE>
<CAPTION>
NET ASSET REALIZED AND DIVIDENDS
VALUE NET UNREALIZED FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT GAINS ON INVESTMENT FROM CAPITAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS
..................................................................
<S> <C> <C> <C> <C> <C>
INCOME FUND
1998* $ 10.82 $ 0.24 $ 0.42 $ (0.24) $ (0.01)
1997 (1) $ 10.00 $ 0.41 $ 0.82 $ (0.41) --
GROWTH AND INCOME FUND
1998* $ 11.76 $ 0.18 $ 0.52 $ (0.18) $ (0.08)
1997 (1) $ 10.00 $ 0.26 $ 1.76 $ (0.26) --
GROWTH FUND
1998* $ 12.12 $ 0.15 $ 0.66 $ (0.15) $ (0.09)
1997 (1) $ 10.00 $ 0.18 $ 2.12 $ (0.18) --
AGGRESSIVE GROWTH FUND
1998* $ 12.58 $ 0.12 $ 0.76 $ (0.12) $ (0.05)
1997 (1) $ 10.00 $ 0.11 $ 2.58 $ (0.11) --
</TABLE>
* All ratios for the period have been annualized.
+ Returns are for the period 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.
The accompanying notes are an integral part of the financial statements.
<PAGE>
15
<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>
$11.23 16.05%+ $ 88,377 0.25%(2) 4.63% 0.84%(2) 98%
$10.82 12.51%+ $ 36,119 0.60%(2) 4.39% 2.00%(2) 29%
$12.20 23.26%+ $227,292 0.25%(2) 3.31% 0.80%(2) 128%
$11.76 20.47%+ $ 27,565 0.60%(2) 2.59% 2.10%(2) 37%
$12.69 28.40%+ $ 61,639 0.25%(2) 2.80% 0.85%(2) 88%
$12.12 23.23%+ $ 15,676 0.60%(2) 1.61% 2.62%(2) 6%
$13.29 33.56%+ $ 65,567 0.25%(2) 2.29% 0.84%(2) 93%
$12.58 27.06%+ $ 13,725 0.60%(2) 0.76% 2.85%(2) 7%
</TABLE>
<PAGE>
16
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Unaudited
1 Organization
The Income Fund, Growth and Income Fund, Growth Fund, and Aggressive
Growth Fund (collectively, the "Funds") are mutual funds offered by First
American Strategy Funds, Inc. ("FASF"). FASF is a corporation organized under
Minnesota law which is registered under the Investment Company Act of 1940, as
amended, as an open-end, investment company. The Funds invest in First American
Funds, Inc. and First American Investment Funds, Inc. mutual funds in a "fund
of funds" structure. FASF's articles of incorporation permit the Board of
Directors to create additional funds and classes in the future. The Funds'
prospectus provides a description of each Fund's investment objectives,
policies, and strategies. Financial statements for the underlying mutual funds
may be obtained by calling 1-800-637-2548.
2 Significant Accounting Policies
SECURITY VALUATION: Investments are valued at the respective net asset
value of each underlying fund, determined at the close of the New York Stock
Exchange (generally 3:00pm central time) on the valuation date.
DISTRIBUTION TO SHAREHOLDERS: The Funds declare and pay income dividends
monthly.
FEDERAL INCOME TAXES: It is each Fund's intention to qualify as a regulated
investment company for Federal income tax purposes and to distribute all of its
taxable income. Accordingly, no provisions for Federal income taxes is required.
For Federal income tax purposes, required distributions related to realized
gains from security transactions are computed as of October 31st. The amounts of
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from those amounts determined under generally accepted accounting principles.
These book/tax differences are either temporary or permanent in nature.
<PAGE>
17
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Unaudited
SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are
recorded on the trade date of the security purchase or sale. Income and capital
gain distributions from underlying funds are recorded on the ex-dividend date.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for Federal income tax purposes.
EXPENSES: Expenses that are directly related to one of the Funds are
charged directly to that fund. Other operating expenses of the Funds are
prorated to the Funds on the basis of relative net asset value.
3 Fees and Expenses
Pursuant to an investment advisory agreement (the Agreement), U.S. Bank
National Association (the Adviser) manages each Fund's assets and furnishes
related office facilities, equipment, research and personnel. The Agreement
requires each Fund to pay the Adviser a monthly fee based upon average daily net
assets. The fee for each of the Funds is equal to an annual rate of 0.25% of the
average daily net assets. The Adviser waived their entire fee for the current
period. Such waivers are voluntary and may be discontinued at any time.
Through a separate contractual agreement, U.S. Bank Trust National
Association, an affiliate of the Adviser, serves as the Funds' custodian.
SEI Investments Distribution Co. (SIDCO) and SEI Investments Management
Corporation (SIMC) serve as distributor and administrator of the Funds,
respectively. FASF has adopted and entered into a shareholder service plan and
agreement with SIDCO. Each Fund pays to SIDCO a shareholder servicing fee at an
annual rate of 0.25% of the average daily net asset value of all shares of each
Fund, which is computed daily and paid monthly. SIDCO provides administrative
services, including certain accounting, legal, and shareholder services, at an
annual rate of 0.12% of each Fund's
<PAGE>
18
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Unaudited
average daily net assets, with a minimum annual fee of $50,000 per Fund. To the
extent that the aggregate net assets of all the First American Funds exceeds $8
billion, the percentage stated above is reduced to 0.105%. 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 net assets.
In addition to the investment advisory and management fees, custodian fees,
service fees, administrator and transfer agent fees, each fund is responsible
for paying most other operating expenses including organization costs, fees and
expenses of outside directors, registration fees, printing shareholder reports,
legal, auditing, insurance and other miscellaneous expenses. In addition to the
Fund's direct expenses, as described above, Fund shareholders also bear a
proportionate share of the underlying Fund's expenses.
For the period ended March 31, 1998, legal fees and expenses were paid to a
law firm of which the Secretary of the Funds is a partner.
DST Systems, Inc. provides transfer agent services for the Fund.
4 Investment Security Transactions
During the period ended March 31,1998, purchases of securities and proceeds
from sales of securities, other than temporary investments in short-term
securities were as follows (000):
PURCHASES SALES
.......... .........
Income Fund $ 60,507 $ 57,835
Growth and Income Fund 159,967 136,981
Growth Fund 45,452 29,302
Aggressive Growth Fund 50,243 32,784
At March 31, 1998 the total cost of securities for Federal income tax
purposes, was not materially different from amounts reported for financial
reporting purposes. The aggregate gross unrealized
<PAGE>
19
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Unaudited
appreciation and depreciation for securities held by the Funds at March 31, 1998
is as follows (000):
AGGREGATE AGGREGATE
GROSS GROSS
APPRECIATION DEPRECIATION NET
.............. .............. ......
Income Fund $ 2,021 $ (166) $1,855
Growth and Income Fund 10,310 (750) 9,560
Growth Fund 3,237 (163) 3,074
Aggressive Growth Fund 3,887 (178) 3,709
5 Deferred Organizational and Offering Costs
Organizational costs have been capitalized by the funds and are being
amortized over 60 months commencing with operations on a straight-line basis. In
the event any of the initial shares are redeemed by any holder thereof during
the period that the funds are amortizing their organizational costs, the
redemption proceeds payable to the holder thereof by the fund will be reduced by
the unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of the redemption. These costs include legal fees of approximately $60,000
for organizational work performed by a law firm of which the Secretary of the
Funds is a partner.
6 Mergers
On November 21, 1997, the following reorganization of the Qualivest funds
into the First American family of Funds took place pursuant to a Plan of
Reorganization approved by the Qualivest shareholders on October 31, 1997:
QUALIVEST ACQUIRED FUND FASF ACQUIRING FUND
........................... ......................
Allocated Conservative Fund Income Fund
Allocated Balanced Fund Growth and Income Fund
Allocated Growth Fund Growth Fund
Allocated Aggressive Fund Aggressive Growth Fund
<PAGE>
20
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Unaudited
The acquisition was accounted for by the method of accounting for tax free
mergers of investment companies (sometimes referred to as the pooling without
restatement method). Under the Agreement and Plan of Reorganization, Qualivest
Class A & Y shares were exchanged for shares of FASF.
The net assets acquired and shares issued by the corresponding FASF funds
were as follows:
FUND NET ASSETS SHARES ISSUED
................................ ............ ..............
Income Fund $10,015,331 917,583
Growth and Income Fund 139,897,141 12,099,422
Growth Fund 28,454,263 2,408,353
Aggressive Growth Fund 32,858,363 2,704,646
Included in the net assets from the Qualivest Funds were the following
components:
<TABLE>
<CAPTION>
OVER
ADDITIONAL DISTRIBUTED REALIZED UNREALIZED
FUND PAID IN CAPITAL INCOME GAIN/(LOSS) GAIN
...................... ................. ............. ............. ............
<S> <C> <C> <C> <C>
Allocated Conservative $ 329,276 $ (3,142) $ (7,224) $ 339,641
Allocated Balanced 6,181,605 (42,048) (200,084) 6,423,738
Allocated Growth 1,572,626 (8,243) (11,696) 1,592,565
Allocated Aggressive 985,478 (10,581) 11,601 984,458
</TABLE>
On November 21, 1997 the shares redeemed by the corresponding Qualivest
Funds were as follows:
SHARES
QUALIVEST ACQUIRED FUND REDEEMED
....................... ............
Allocated Conservative $10,015,331
Allocated Balanced 139,903,600
Allocated Growth 28,454,263
Allocated Aggressive 32,858,362
<PAGE>
21
NOTICE TO SHAREHOLDERS
March 31, 1998
Unaudited
Shareholder Voting Results
A special meeting of shareholders was called for October 31, 1997, at which
the shareholders of FASF voted on the election of the company's Board of
Directors. The results of the voting were as follows:
ROBERT J. DAYTON JOSEPH D. STRAUSS
FOR 6,472,937 FOR 6,472,937
AGAINST 12,566 AGAINST 12,566
ABSTAIN 0 ABSTAIN 0
ANDREW M. HUNTER VIRGINIA L. STRINGER
FOR 6,472,937 FOR 6,472,937
AGAINST 12,566 AGAINST 12,566
ABSTAIN 0 ABSTAIN 0
LEONARD W. KEDROWSKI ROGER A. GIBSON
FOR 6,472,937 FOR 6,472,937
AGAINST 12,566 AGAINST 12,566
ABSTAIN 0 ABSTAIN 0
ROBERT L. SPIES
FOR 6,472,937
AGAINST 12,566
ABSTAIN 0
A second vote took place to ratify KPMG Peat Marwick as independent public
accountants for the company for the fiscal year ended September 30, 1997. The
results of the vote were as follows:
FOR 6,454,827
AGAINST 4,608
ABSTAIN 26,066
<PAGE>
22
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<PAGE>
23
FIRST AMERICAN FUNDS BOARD OF DIRECTORS
MR. ROBERT J. DAYTON
Director of the First American Funds, Chief Executive Officer
of Okabena Company.
MR. ROGER GIBSON
Director of the First American Funds, Vice President of North
America-Mountain Region for United Airlines.
MR. ANDREW M. HUNTER III
Director of the First American Funds, Chairman of Hunter,
Keith Industries.
MR. LEONARD W. KEDROWSKI
Director of the First American Funds, Owner and President
of Executive Management Consulting, Inc.
MR. ROBERT SPIES
Director of the First American Funds, Retired Vice President,
U.S. Bank National Association.
MR. JOSEPH D. STRAUSS
Director of the First American Funds, Former Chairman of
First American Funds, Owner and President of Strauss
Management Company.
MS. VIRGINIA L. STRINGER
Chairman of the First American Funds, Owner and President
of Strategic Management Resources, Inc.
<PAGE>
FIRST AMERICAN STRATEGY FUNDS, INC.
1 Freedom Valley Drive
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
ADMINISTRATOR
SEI INVESTMENTS MANAGEMENT CORPORATION
1 Freedom Valley Drive
Oaks, Pennsylvania 19456
TRANSFER AGENT
DST SYSTEMS, INC.
330 West 9th Street
Kansas City, Missouri 64105
DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
1 Freedom Valley Drive
Oaks, Pennsylvania 19456
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
COUNSEL
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
This report and the financial statements contained
herein are submitted for the general information
of the shareholders of the corporation. The report
is not authorized for distribution to prospective
investors in the corporation unless preceded or
accompanied by an effective prospectus for each of
the Funds included. Shares in the Funds are not
deposits or obligations of, or guaranteed or
endorsed by, U.S. Bank or any of its affiliates.
Such shares are also not federally insured by the
Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency. Investment in
the shares involve investment risk including loss
of principal amount invested.
[LOGO]
FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING FASF-1303 5/98
