1933 Act Registration No. 333-7463
1940 Act Registration No. 811-7687
As filed with the Securities and Exchange Commission on February 1, 1999
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FORM N-1A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. __ | |
Post-Effective Amendment No. 5 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 |X|
Amendment No. 5
FIRST AMERICAN STRATEGY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices) (Zip Code)
(610) 676-1924
(Registrant's Telephone Number, including Area Code)
JAMES R. FOGGO
c/o SEI INVESTMENTS COMPANY, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
COPIES TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing shall become effective (check
appropriate box):
|X| immediately upon filing pursuant to paragraph (b) of rule 485
| | on February 1, 1999 pursuant to paragraph (b) of rule 485
| | 60 days after filing pursuant to paragraph (a)(1) of Rule 485
| | on February 1, 1999 pursuant to paragraph (a)(1) of Rule 485
| | 75 days after filing pursuant to paragraph (a)(2) of Rule 485
| | on (date) pursuant to paragraph (a)(2) of Rule 485
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<PAGE>
FEBRUARY 1, 1999
STRATEGY FUNDS
Strategy Aggressive Growth Fund
Strategy Growth Fund
Strategy Growth and Income Fund
Strategy Income Fund
First American
Strategy Funds, Inc.
PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these funds, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING (R)
<PAGE>
TABLE OF
CONTENTS
FUND SUMMARIES
Objectives and Main Investment Strategies 2
Main Risks 3
Fund Performance 5
Fees and Expenses 7
POLICIES & SERVICES
Buying Shares 9
Selling Shares 10
Managing Your Investment 11
ADDITIONAL INFORMATION
Management 13
More About The Funds 15
The Underlying Funds 16
Financial Highlights 25
FOR MORE INFORMATION Back Cover
<PAGE>
FUND SUMMARIES
INTRODUCTION
This section of the prospectus describes the objectives of the First American
Strategy Funds, summarizes the main investment strategies used by each fund in
trying to achieve its objectives, and highlights the risks involved with these
strategies. It also provides you with information about the performance, fees
and expenses of the funds.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OF U.S. BANK NATIONAL ASSOCIATION
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
1 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
OBJECTIVES AND MAIN INVESTMENT STRATEGIES
Each of the funds described in this prospectus is a "fund of funds." The funds
are intended to provide differing balances between the objectives of current
income and growth of capital. Each fund seeks to achieve its objectives by
investing in a variety of other mutual funds which are also advised by the
funds' investment advisor.
- --------------------------------------------------------------------------------
OBJECTIVES
STRATEGY AGGRESSIVE GROWTH FUND seeks a high level of capital growth.
STRATEGY GROWTH FUND seeks capital growth with a moderate level of current
income.
STRATEGY GROWTH AND INCOME FUND seeks both capital growth and current income.
STRATEGY INCOME FUND seeks a high level of current income consistent with
limited risk to capital.
- --------------------------------------------------------------------------------
MAIN INVESTMENT STRATEGIES
Each fund seeks to achieve its objectives by investing in a variety of other
mutual funds which are also advised by the funds' investment advisor. Strategy
Aggressive Growth Fund and Strategy Growth Fund seek their objectives by
providing high allocations to various equity categories, including small company
and international company equity securities. Strategy Growth and Income Fund
takes a balanced approach to equity securities and fixed income investments.
Strategy Income Fund provides a high allocation to fixed income investments, but
also has a limited equity component designed to help offset inflation and
provide a source for potential increases in income over time.
The underlying funds in which the Strategy Funds invest include the 10 equity
funds and two fixed income funds named in the table below and Prime Obligations
Fund, a money market fund. The funds' advisor allocates and reallocates each
fund's assets among the underlying funds within ranges designed to reflect the
funds' differing balances between the investment objectives of current income
and growth of capital. The following table illustrates these ranges, expressed
as percentages of the funds' net assets.
<TABLE>
<CAPTION>
Aggressive Growth and
Growth Fund Growth Fund Income Fund Income Fund
---------------- ---------------- ---------------- ---------------
MIN MAX MIN MAX MIN MAX MIN MAX
------- -------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS AS A WHOLE 60% 100% 50% 90% 35% 75% 15% 45%
Large Cap Growth Fund 5% 45% 5% 40% 5% 35% 0% 0%
Large Cap Value Fund 5% 45% 5% 40% 5% 35% 0% 0%
Mid Cap Growth Fund 5% 45% 0% 30% 0% 20% 0% 0%
Mid Cap Value Fund 5% 45% 0% 30% 0% 20% 0% 0%
Small Cap Growth Fund 0% 40% 0% 30% 0% 20% 0% 0%
Small Cap Value Fund 0% 40% 0% 30% 0% 20% 0% 0%
Equity Income Fund 0% 0% 0% 0% 0% 0% 15% 45%
Real Estate Securities Fund 0% 0% 0% 0% 0% 15% 0% 15%
Emerging Markets Fund 0% 15% 0% 15% 0% 10% 0% 0%
International Fund 0% 35% 0% 30% 0% 20% 0% 0%
FIXED INCOME FUNDS AS A WHOLE 0% 40% 10% 50% 25% 65% 55% 85%
Fixed Income Fund 0% 40% 0% 50% 10% 65% 25% 85%
Strategic Income Fund 0% 15% 0% 20% 0% 20% 0% 25%
PRIME OBLIGATIONS FUND 0% 35% 0% 35% 0% 35% 0% 25%
</TABLE>
In addition to investing in Prime Obligations Fund, each fund also may invest in
cash, U.S. dollar-denominated high-quality money market instruments and other
short-term securities. Normally, each fund's aggregate investment in these items
and in Prime Obligations Fund will not exceed the maximum percentage in the
above table for Prime Obligations Fund. However, in an attempt to respond to
adverse market, economic, political or other conditions, each fund may
temporarily invest without limit in cash, U.S. dollar-denominated high-quality
money market instruments and other short-term securities. Investing a
significant percentage of a fund's assets in these securities may prevent the
fund from achieving its objectives.
2 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
MAIN RISKS
The value of your investment in a fund will change daily, which means you could
lose money. The main risks of investing in the funds include:
ACTIVE MANAGEMENT
Each fund is actively managed and its performance therefore will reflect in part
the advisor's ability to make asset allocation and other investment decisions
which are suited to achieving the fund's 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 an investment in one of the funds
involves additional expenses that would not be present in a direct investment in
the underlying funds.
RISKS ASSOCIATED WITH THE UNDERLYING FUNDS
The funds are subject to the risks of the underlying funds in which they invest.
These risks, some of which are discussed in more detail under "The Underlying
Funds," include:
o The underlying funds are actively managed and therefore may underperform
other mutual funds with similar investment objectives.
o Each underlying fund 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,
the net asset values of funds which invest higher proportions of their
assets in equity funds may be more volatile than funds which are limited to
lower proportions.
o Small Cap Growth Fund, Small Cap Value Fund, Emerging Markets Fund and
International Fund are subject to the risks of investing in small
capitalization companies. These stocks historically have experienced greater
price volatility than stocks of larger capitalization companies.
o Mid Cap Growth Fund and Mid Cap Value Fund invest in stocks of mid
capitalization companies. Although these stocks may be slightly less
volatile than those of small capitalization companies, they still involve
substantial risk.
o Real Estate Securities Fund is subject to risks associated with
non-diversification and with concentrating its investments in the real
estate industry, and to the risks associated with direct investments in real
estate investment trusts.
o International Fund, Emerging Markets Fund and Strategic Income Fund are
subject to risks associated with investing in foreign securities, including
currency risk. These risks are particularly significant in emerging markets,
where Strategic Income Fund may invest and where Emerging Markets Fund
primarily invests. International Fund and Emerging Markets Fund are also
subject to the risks of entering into foreign currency hedging transactions.
o Most of the other equity funds invest a portion of their assets in foreign
securities which are dollar-denominated and publicly traded in the United
States, and which may involve risks not associated with the securities of
domestic issuers.
o The fixed income funds are subject to interest rate risk (the risk that debt
securities held by a fund will decrease in value when interest rates rise),
income risk (the risk that a fund's income could decline due to falling
market interest rates), credit risk (the risk that the issuer of debt
securities will not make timely principal or interest payments on its
securities), and call risk (the risk that the issuer of debt securities will
prepay those securities before their stated maturity, requiring the fund to
reinvest the prepayment at a lower interest rate).
o The fixed income funds may invest in mortgage- and/or asset-backed
securities. These are subject to the risk that falling interest rates will
cause faster than expected prepayments of the obligations underlying the
securities, which must be reinvested at lower interest rates. They are also
subject to the risk that rising interest rates will cause prepayments to
slow, extending the life of mortgage- and asset-backed securities with lower
interest rates.
o Each fixed income fund may invest up to 25% of its total assets in dollar
roll transactions, which could increase the volatility of the fund's share
price and possibly diminish the fund's investment performance.
o Most of the underlying funds lend their portfolio securities to
broker-dealers, banks and other institutions. These funds are subject to the
risk that the other party to the securities lending agreement will default
on its obligations.
o Strategic Income Fund may invest a significant portion of its assets in
non-investment grade debt obligations, which are commonly called
"high-yield" securities or "junk bonds." In addition, Equity Income Fund may
invest in non-investment grade convertible debt obligations. High yield
securities generally have more volatile prices and carry more risk to
principal than investment grade securities.
POSSIBLE CONFLICTS OF INTEREST
The funds and the underlying funds have the same officers, directors and
investment advisor. If situations arise in which the interests of the funds are
different from those of the underlying funds, these officers and directors and
the advisor could be subject to conflicts of interest. For example, the advisor
might determine that a fund should reduce its allocation of assets to a
particular underlying fund, thus requiring the fund to redeem shares of the
underlying fund, at a time when it is not in the best interests of the
underlying fund to sell portfolio securities in order to meet the redemption
request. The advisor will monitor the operations of the funds and the underlying
funds for potential conflicts of interest, and recommend to the funds' board of
directors the steps which it believes are necessary to avoid or minimize adverse
consequences to the funds and the underlying funds.
3 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
MAIN RISKS (CONTINUED)
YEAR 2000 ISSUES
Like other mutual funds and business and financial organizations, the funds
could be adversely affected if the computer systems used by the funds' and
underlying funds' advisor, sub-advisors, other service providers and entities
with computer systems that are linked to fund records do not properly process
and calculate date-related information from and after January 1, 2000. While
year 2000-related computer problems could have a negative effect on the funds,
the funds' administrator has undertaken a program designed to assess and monitor
the steps being taken by the funds' and underlying funds' service providers to
address year 2000 issues. This program includes seeking assurances from service
providers that their systems are or will be year 2000 compliant and reviewing
service providers' periodic reports to monitor their status concerning their
year 2000 readiness and compliance.
The administrator and the advisor also report regularly to the funds' board of
directors concerning their own and other service providers' progress toward year
2000 readiness. Although these reports indicate that service providers are or
expect to be year 2000 compliant, there can be no assurance that this will be
the case in all instances or that year 2000 difficulties experienced by others
in the financial services industry will not impact the funds. In addition, there
can be no assurance that year 2000 difficulties will not have an adverse effect
on the funds' investments or on global markets or economies, generally. The
funds are not bearing any of the expenses incurred by their service providers in
preparing for the year 2000.
4 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
FUND PERFORMANCE
The charts and tables that follow provide you with information on each fund's
volatility and performance. Of course, how a fund has performed in the past does
not necessarily indicate how it will perform in the future.
Each fund's bar chart show shows you how performance of the fund's shares has
varied from year to year.
The tables compare each fund's performance over different time periods to that
of the fund's benchmark indices, which are broad measures of market performance.
Each fund's performance reflects fund expenses; the benchmarks are unmanaged and
have no expenses.
Both the charts and the tables assume that all distributions have been
reinvested.
STRATEGY AGGRESSIVE GROWTH FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1997 18.01%
1998 7.36%
BEST QUARTER:
Quarter ending: 12/31/98
Total return 14.77%
WORST QUARTER:
Quarter ending: 9/30/98
Total return -14.93%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Inception(1)
- --------------------------------------------------------------------------------
Strategy Aggressive Growth Fund 10/01/96 7.36% 12.95%
- --------------------------------------------------------------------------------
Standard & Poor's Composite 500 Index(2) 28.60% 33.09%
- --------------------------------------------------------------------------------
Lehman Government/Corporate Bond Index(3) 9.47% 10.36%
- --------------------------------------------------------------------------------
(1)The since inception performance of each index is calculated from 10/31/96.
(2)An unmanaged index of large capitalization stocks.
(3)An unmanaged index of Treasury securities, other securities issued by the
U.S. government or its agencies or instrumentalities, and investment grade
corporate debt securities.
STRATEGY GROWTH FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1997 16.36%
1998 7.52%
BEST QUARTER:
Quarter ending: 12/31/98
Total return 12.19%
WORST QUARTER:
Quarter ending: 9/30/98
Total return -11.92%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Inception(1)
- --------------------------------------------------------------------------------
Strategy Growth Fund 10/01/96 7.52% 12.39%
- --------------------------------------------------------------------------------
Standard & Poor's Composite 500 Index(2) 28.60% 33.09%
- --------------------------------------------------------------------------------
Lehman Government/Corporate Bond Index(3) 9.47% 10.36%
- --------------------------------------------------------------------------------
(1)The since inception performance of each index is calculated from 10/31/96.
(2)An unmanaged index of large capitalization stocks.
(3)An unmanaged index of Treasury securities, other securities issued by the
U.S. government or its agencies or instrumentalities, and investment grade
corporate debt securities.
5 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
FUND PERFORMANCE (CONTINUED)
STRATEGY GROWTH AND INCOME FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1997 13.96%
1998 8.20%
BEST QUARTER:
Quarter ending: 12/31/98
Total return 10.00%
WORST QUARTER:
Quarter ending: 9/30/98
Total return -8.30%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Inception(1)
- --------------------------------------------------------------------------------
Strategy Growth and Income Fund 10/01/96 8.20% 12.24%
- --------------------------------------------------------------------------------
Standard & Poor's Composite 500 Index(2) 28.60% 33.09%
- --------------------------------------------------------------------------------
Lehman Government/Corporate Bond Index(3) 9.47% 10.36%
- --------------------------------------------------------------------------------
(1)The since inception performance of each index is calculated from 10/31/96.
(2)An unmanaged index of large capitalization stocks.
(3)An unmanaged index of Treasury securities, other securities issued by the
U.S. government or its agencies or instrumentalities, and investment grade
corporate debt securities.
STRATEGY INCOME FUND
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR
[BAR GRAPH]
1997 12.72%
1998 8.46%
BEST QUARTER:
Quarter ending: 6/30/97
Total return 4.87%
WORST QUARTER:
Quarter ending: 9/30/98
Total return -0.04%
AVERAGE ANNUAL TOTAL RETURNS Inception Since
AS OF 12/31/98 Date One Year Inception(1)
- --------------------------------------------------------------------------------
Strategy Income Fund 10/01/96 8.46% 10.79%
- --------------------------------------------------------------------------------
Standard & Poor's Composite 500 Index(2) 28.60% 33.09%
- --------------------------------------------------------------------------------
Lehman Government/Corporate Bond Index(3) 9.47% 10.36%
- --------------------------------------------------------------------------------
(1)The since inception performance of each index is calculated from 10/31/96.
(2)An unmanaged index of large capitalization stocks.
(3)An unmanaged index of Treasury securities, other securities issued by the
U.S. government or its agencies or instrumentalities, and investment grade
corporate debt securities.
6 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
FEES AND EXPENSES
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the funds. The funds do not impose any sales charges (loads)
when you buy, sell or exchange shares. Each fund imposes a redemption fee of 1%
if you redeem your shares within 12 months of purchase. See "Selling Shares --
How to Sell Shares -- Redemption Fee." In addition, when you hold shares of one
of the funds, you indirectly pay a portion of that fund's operating expenses.
The figures below are based on fund expenses during the fiscal year ended
September 30, 1998.(1) As illustrated in other tables under this caption, fund
shareholders also indirectly bear a portion of the underlying funds' expenses.
<TABLE>
<CAPTION>
Aggressive Growth and
Growth Fund Growth Fund Income Fund Income Fund
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ------------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) None None None None
MAXIMUM DEFERRED SALES CHARGE (LOAD) None None None None
REDEMPTION FEE(2)
AS A % OF AMOUNT REDEEMED 1.00% 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS
(expenses that are deducted from fund assets)
- ------------------------------------------------------------------------------------------------------
Management Fees 0.25% 0.25% 0.25% 0.25%
Distribution and Service (12b-1) Fees None None None None
Other Expenses
Shareholder Servicing Fee 0.25% 0.25% 0.25% 0.25%
Miscellaneous 0.37% 0.39% 0.32% 0.34%
TOTAL 0.87% 0.89% 0.82% 0.84%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1)Actual expenses for the fiscal year were lower than those shown in the table
because of voluntary fee waivers and expense reimbursements by the advisor.
See "Additional Information - Financial Highlights." THE ADVISOR INTENDS TO
WAIVE FEES AND REIMBURSE EXPENSES DURING THE CURRENT FISCAL YEAR SO THAT
TOTAL OPERATING EXPENSES FOR EACH FUND DO NOT EXCEED 0.30%. WAIVERS AND
REIMBURSEMENTS MAY BE DISCONTINUED AT ANY TIME.
(2)Payable if you redeem your shares within 12 months of purchase.
RANGES OF COMBINED DIRECT AND INDIRECT EXPENSE RATIOS
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 lists the ranges of combined direct and indirect
expense ratios borne by fund shareholders, 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 listed under "Underlying Fund Expense
Ratios" below.
<TABLE>
<CAPTION>
RANGES OF COMBINED DIRECT
AND INDIRECT EXPENSE RATIOS Aggressive Growth and
AS A % OF AVERAGE NET ASSETS(1) Growth Fund Growth Fund Income Fund Income Fund
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.62% to 2.38% 1.64% to 2.38% 1.57% to 2.11% 1.62% to 1.76%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1)The underlying funds' advisor intends to waive fees during the current fiscal
year so that expense ratios do not exceed certain levels, as set forth in
footnote 1 to the Underlying Fund Expense Ratios table below. In addition,
the funds' advisor intends to waive fees and reimburse expenses during the
current fiscal year so that total operating expenses for each fund do not
exceed 0.30%. Taking these waivers and reimbursements into account, the
ranges of combined direct and indirect expense ratios would be 0.98% to 1.48%
for Aggressive Growth Fund, 0.96% to 1.44% for Growth Fund, 0.95% to 1.33%
for Growth and Income Fund, and 0.95% to 1.08% for Income Fund. Waivers and
reimbursements may be discontinued at any time.
7 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FUND SUMMARIES
FEES AND EXPENSES (CONTINUED)
- --------------------------------------------------------------------------------
EXAMPLE This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds. It is based upon the
midpoint of the expense ranges set forth above, and assumes that you invest
$10,000 for the time periods indicated and then redeem all of your shares at the
end of those periods. The example also assumes that your investment has a 5%
return each year, and that each fund's operating expenses remain the same.
Although your actual costs and returns may differ, based on these assumptions
your cost would be:
Aggressive Growth and
Growth Fund Growth Fund Income Fund Income Fund
- -----------------------------------------------------------------------------
1 year $ 303 $ 304 $ 287 $ 272
3 years $ 627 $ 630 $ 579 $ 533
5 years $1,078 $1,083 $ 995 $ 918
10 years $2,327 $2,338 $2,159 $1,998
You would pay the following expenses if you did not redeem your shares:
Aggressive Growth and
Growth Fund Growth Fund Income Fund Income Fund
- -----------------------------------------------------------------------------
1 year $ 203 $ 204 $ 187 $ 172
3 years $ 627 $ 630 $ 579 $ 533
5 years $ 1,078 $ 1,083 $ 995 $ 918
10 years $ 2,327 $ 2,338 $ 2,159 $1,998
UNDERLYING FUND EXPENSE RATIOS
The table below lists the expense ratios of the underlying funds. 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 are based on expenses
during the fiscal year ended September 30, 1998.(1)
Underlying Fund Expense Ratio
- ---------------------------------------------------
Large Cap Growth Fund(5) 0.86%
Large Cap Value Fund(5) 0.88%
Mid Cap Growth Fund(5) 0.87%
Mid Cap Value Fund(4,5) 0.89%
Small Cap Growth Fund(5) 0.90%
Small Cap Value Fund 0.88%
Equity Income Fund(2,3,4) 0.87%
Real Estate Securities Fund(2,3) 0.93%
International Fund(5) 1.56%
Emerging Markets Fund(5) 3.30%
Fixed Income Fund 0.86%
Strategic Income Fund 1.05%
Prime Obligations Fund 0.53%
- ---------------------------------------------------
(1)Actual expense ratios for the fiscal year were lower than those shown in the
table because of voluntary fee waivers by the advisor. The advisor intends to
waive fees during the current fiscal year so that expense ratios do not
exceed the following amounts: Large Cap Growth Fund, 0.80%; Large Cap Value
Fund, 0.80%; Mid Cap Growth Fund, 0.90%; Mid Cap Value Fund, 0.90%; Small Cap
Growth Fund, 0.90%; Small Cap Value Fund, 0.90%; Equity Income Fund, 0.75%;
Real Estate Securities Fund, 0.80%; International Fund, 1.35%; Emerging
Markets Fund, 1.45%; Fixed Income Fund, 0.70%; Strategic Income Fund, 0.90%;
and Prime Obligations Fund, 0.45%. Fee waivers may be discontinued at any
time.
(2)Growth Fund is not permitted to invest in this underlying fund.
(3)Aggressive Growth Fund is not permitted to invest in this underlying fund.
(4)Growth and Income Fund is not permitted to invest in this underlying fund.
(5)Income Fund is not permitted to invest in this underlying fund.
8 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
POLICIES & SERVICES
BUYING SHARES
You may become a shareholder in any of the funds with an initial investment of
$1,000 or more ($250 for a retirement plan). Additional investments can be made
for as little as $100 ($25 for a retirement plan). The funds have the right to
waive these minimum investment requirements for employees of the funds' advisor
and its affiliates. The funds also have the right to reject any purchase order.
- --------------------------------------------------------------------------------
CALCULATING YOUR SHARE PRICE
Your purchase price for fund shares will be their net asset value (NAV) -- there
is no sales charge. The NAV of each fund's shares is generally calculated as of
the close of regular trading on the New York Stock Exchange (usually 3 p.m.
Central time) every day the exchange is open.
A fund's NAV is equal to the value of its investments and other assets, less any
liabilities, divided by the number of fund shares. The assets of each fund
normally will consist primarily of shares of the underlying funds, which are
valued at their net asset values.
For the underlying funds, investments and other assets will be valued at their
market values. If market prices are not readily available for an investment or
if the advisor believes they are unreliable, fair value prices may be determined
in good faith using methods approved by the funds' board of directors. Emerging
Markets Fund, International Fund and Strategic Income Fund will hold portfolio
securities that trade on weekends or other days the funds do not price their
shares. Therefore, the net asset value of these underlying funds' shares may
change on days when you will not be able to purchase or redeem your fund shares.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You may buy shares on any day the New York Stock Exchange is open. Your shares
will be priced at the next NAV calculated after your order is accepted by the
fund, plus any applicable sales charge. To make sure that your order is
accepted, follow the directions for purchasing shares given below.
BY PHONE
You may purchase shares by calling your broker or financial institution, if they
have a sales agreement with the funds' distributor. In many cases, your order
will be effective that day if received by your broker or financial institution
by the close of regular trading on the New York Stock Exchange. In some cases,
however, you will have to transmit your request by an earlier time in order for
your purchase request to be effective that day. This allows your broker or
financial institution time to process your request and transmit it to the fund.
Some financial institutions may charge a fee for helping you purchase shares.
Contact your broker or financial institution for more information.
If you are paying by wire, you may purchase shares by calling 1-888-997-8728
before 3 p.m. Central time. All information will be taken over the telephone,
and your order will be placed when the funds' custodian receives payment by
wire. Wire federal funds as follows:
U.S. Bank National Association, Minneapolis, MN
ABA Number 091000022
For Credit to: DST Systems, Inc.:
Account Number 160234580266
For Further Credit to (investor name and fund name)
You cannot purchase shares by wire on days when federally chartered banks are
closed.
BY MAIL
To purchase shares by mail, simply complete and sign a new account form, enclose
a check made payable to the fund you wish to invest in, and mail both to:
First American Funds
c/o DST Systems, Inc.
P.O. Box 419382
Kansas City, Missouri 64141-6382
After you have established an account, you may continue to purchase shares by
mailing your check to First American Funds at the same address.
Please note the following:
o All purchases must be made in U.S. dollars.
o Third-party checks, credit cards, credit card checks and cash are not
accepted.
o If a check does not clear your bank, the funds reserve the right to cancel
the purchase, and you could be liable for any losses or fees incurred.
- --------------------------------------------------------------------------------
INVESTING AUTOMATICALLY
To purchase shares as part of a savings discipline, you may add to your
investment on a regular basis:
o by having $100 or more automatically withdrawn from your bank account on a
periodic basis and invested in fund shares.
o through automatic monthly exchanges of your class A shares of Prime
Obligations Fund, a money market fund in the First American family of funds.
You may apply for participation in either of these programs through your broker
or financial institution or by calling 1-888-997-8728.
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COMPENSATION TO BROKERS AND FINANCIAL INSTITUTIONS
Although there is no sales charge when you purchase fund shares, your broker or
financial institution may receive compensation in connection with your purchase.
Each fund pays the funds' distributor an annual shareholder servicing fee equal
to 0.25% of the fund's average daily net assets to compensate the distributor
for providing services to shareholders. The distributor may use this fee to
compensate your broker or financial institution for providing ongoing services
to your account. The advisor, the administrator or the distributor may pay
additional fees to brokers and financial institutions, using their own assets,
in exchange for sales and/or administrative services performed on behalf of the
broker's or financial institution's customers. The advisor may pay its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
an amount equal to up to 3% of the net asset value of fund shares sold though
them.
9 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
POLICIES & SERVICES
SELLING SHARES
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your shares will be sold at the next NAV calculated after your order is accepted
by the fund, less any applicable redemption fee. To make sure that your order is
accepted, follow the directions for selling shares given below.
The proceeds from your sale normally will be mailed or wired within one day, but
in no event more than seven days, after your request is received in proper form.
BY PHONE
If you purchased shares through a broker or financial institution, simply call
them to sell your shares. In many cases, your redemption will be effective that
day if received by your broker or financial institution by the close of regular
trading on the New York Stock Exchange. In some cases, however, you will have to
call by an earlier time in order for your redemption to be effective that day.
This allows your broker or financial institution time to process your request
and transmit it to the fund. Contact your broker or financial institution
directly for more information.
If you did not purchase shares through a broker or financial institution, you
may sell your shares by calling 1-888-997-8728. Proceeds can be wired to your
bank account (if the proceeds are at least $1,000 and you have previously
supplied your bank account information to the transfer agent) or sent to you by
check.
If you recently purchased your shares by check or through the Automated Clearing
House (ACH), proceeds from the sale of those shares may not be available until
your check or ACH payment has cleared, which may take up to 10 calendar days
from the date of purchase.
BY MAIL
To sell shares by mail, send a written request to your
broker or financial institution, or to the funds' transfer
agent at the following address:
First American Funds
c/o DST Systems, Inc.
P.O. Box 419382
Kansas City, Missouri 64141-6382
Your request should include the following information:
o name of the fund;
o account number;
o dollar amount or number of shares redeemed;
o name on the account; and
o signatures of all registered account owners.
Signatures on a written request must be guaranteed if:
o you would like the proceeds from the sale to be paid to anyone other than to
the shareholder of record.
o you would like the check mailed to an address other than the address on the
funds' records.
o your redemption request is for $25,000 or more.
A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
Proceeds from a written redemption request will be sent to you by check.
REDEMPTION FEE
Each fund imposes a redemption fee of 1% if you redeem your shares within 12
months of purchase. This fee, which is intended to discourage short-term
trading, is paid to the fund. The redemption fee will be based on the value of
your shares at the time of purchase or at the time of sale, whichever is less.
The charge does not apply to shares you acquired by reinvesting your dividend or
capital gain distributions. When you sell shares, they will be sold in the order
that minimizes your redemption fee.
The redemption fee will be waived for 401(k) plans and other institutional
accounts of the funds' advisor.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
If your account has a value of $5,000 or more, you may redeem a specific dollar
amount from your account on a regular basis. To set up systematic withdrawals,
contact your broker or financial institution.
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Except for retirement plans, if your account balance falls below $500 as a
result of selling or exchanging shares, you will receive written notice and
be given 60 days to re-establish the minimum balance. If you do not, the fund
may close your account and send you the proceeds.
10 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT
- --------------------------------------------------------------------------------
EXCHANGING SHARES
If your investment goals or your financial needs change, you may move from one
Strategy Fund to another. Exchanges are made based on the net asset value per
share of each fund at the time of the exchange. There is no fee to exchange
shares. If you exchange shares held for less than 12 months you do not have to
pay a redemption fee. Instead, the time you held shares of the "old" fund will
be added to the time you hold the shares of the "new" fund for purposes of
determining when the 12 month redemption fee period expires.
Shares of the Strategy Funds may not be exchanged for shares of the underlying
funds.
Before exchanging into any fund, be sure to read its prospectus carefully. A
fund may change or cancel its exchange policies at any time. You will be
notified of any changes. The funds have the right to limit exchanges to four
times per year.
BY PHONE
You may exchange shares by calling your broker, your financial institution, or
the funds' transfer agent, provided that both funds have identical shareholder
registrations. To request an exchange through the funds' transfer agent, call
1-888-997-8728. Your instructions must be received by the funds' transfer agent
before 3 p.m. Central time, or by the time specified by your broker or financial
institution, in order for shares to be exchanged the same day.
BY MAIL
To exchange shares by written request, please follow the procedures under
"Selling Shares." Be sure to include the names of both funds involved in the
exchange.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You may buy, sell or exchange shares by telephone, unless you elected on your
new account form to restrict this privilege. If you wish to reinstate this
option on an existing account, please call Investor Services at
1-888-997-8728 to request the appropriate form.
The funds and their agents will not be responsible for any losses that may
result from acting on wire or telephone instructions that they reasonably
believe to be genuine. The funds and their agents will each follow reasonable
procedures to confirm that instructions received by telephone are genuine,
which may include taping telephone conversations.
It may be difficult to reach the funds by telephone during periods of unusual
market activity. If you are unable to reach the funds or their agents by
telephone, please consider sending written instructions.
- --------------------------------------------------------------------------------
STAYING INFORMED
SHAREHOLDER REPORTS
Shareholder reports are mailed twice a year, in November and May. They include
financial statements, performance information, a message from your portfolio
managers, and, on an annual basis, the auditors' report.
In an attempt to reduce shareholder costs and help eliminate duplication, the
funds will try to limit their mailings to one report for each address that lists
one or more shareholders with the same last name. If you would like additional
copies, please call 1-888-997-8728.
STATEMENTS AND CONFIRMATIONS
Statements summarizing activity in your account are mailed at least quarterly.
Confirmations are mailed following each purchase or sale of fund shares.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from a fund's net investment income are declared and paid monthly. Any
capital gains are distributed at least once each year.
On the ex-dividend date for a distribution, a fund's share price is reduced by
the amount of the distribution. If you buy shares just before the ex-dividend
date, in effect, you "buy the dividend." You will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
Dividend and capital gain distributions will be reinvested in additional shares
of the fund paying the distribution, unless you request that distributions be
reinvested in another First American fund or paid in cash. This request may be
made on your new account form or by writing to the fund. If you request that
your distributions be paid in cash but those distributions cannot be delivered
because of an incorrect mailing address, the undelivered distributions and all
future distributions will be reinvested in fund shares.
<PAGE>
POLICIES & SERVICES
MANAGING YOUR INVESTMENT (CONTINUED)
- --------------------------------------------------------------------------------
TAXES
Some of the tax consequences of investing in the funds are discussed below. More
information about taxes is in the Statement of Additional Information. However,
because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
TAXES ON DISTRIBUTIONS
Each fund pays its shareholders dividends from its net investment income and any
net capital gains that it has realized. For most investors, fund dividends and
distributions are considered taxable whether they are reinvested or taken in
cash (unless your investment is in an IRA or other tax-advantaged account).
Dividends from a fund's net investment income are taxable as ordinary income.
Distributions of a fund's net capital gains are taxable as long-term gains,
regardless of how long you have held your shares.
11 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
TAXES ON TRANSACTIONS
The sale or exchange of fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
12 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
INVESTMENT ADVISOR
First American Asset Management
601 Second Avenue South
Minneapolis, Minnesota 55402
U.S. Bank National Association (U.S. Bank), acting through its First American
Asset Management division, is the funds' investment advisor. First American
Asset Management provides investment management services to individuals and
institutions, including corporations, foundations, pensions and retirement
plans. As of December 31, 1998, it had more than $80 billion in assets under
management, including investment company assets of approximately $30 billion. As
investment advisor, First American Asset Management manages the funds' business
and investment activities, subject to the authority of the board of directors.
Each fund is required under its investment advisory agreement to pay the
investment advisor a monthly fee for providing investment advisory services
equal to, on an annual basis, 0.25% of the fund's average daily net assets.
During the last fiscal year, however, First American Asset Management waived the
payment of all investment advisory fees. First American Asset Management also is
the investment advisor for each of the underlying funds.
UNDERLYING FUND SUB-ADVISORS
Federated Investment Counseling
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Federated Global Research Corp.
175 Water Street
New York, New York 10038-4964
The above mentioned subsidiaries of Federated Investors are sub-advisors to
Strategic Income Fund. The sub-advisors have been retained by the fund's
investment advisor and are paid a portion of the advisory fee.
Federated Investment Counseling manages Strategic Income Fund's investments in
domestic high-yield debt obligations and U.S. dollar denominated foreign
corporate debt obligations. Federated Global Research Corp. manages the fund's
investments in investment grade and high-yield foreign government and foreign
corporate debt obligations. First American Asset Management manages the fund's
investments in U.S. government and investment grade domestic debt obligations
and determines how the fund's assets will be allocated among the three sectors
in which it invests.
The sub-advisors and other subsidiaries of Federated Investors serve as
investment advisors to a number of investment companies and private accounts.
Marvin & Palmer Associates, Inc.
1201 North Market Street, Suite 2300
Wilmington, Delaware 19801
Marvin & Palmer is the sub-advisor to Emerging Markets Fund and International
Fund, and is responsible for the investment and reinvestment of those funds'
assets and the placement of brokerage transactions for those funds. Marvin &
Palmer has been retained by the funds' investment advisor and is paid a portion
of the advisory fee.
A privately held company founded in 1986, Marvin & Palmer is engaged in the
management of global, non-United States, domestic and emerging markets equity
portfolios, principally for institutional accounts. As of December 31, 1998,
Marvin & Palmer managed a total of approximately $7 billion in investments for
61 investors.
CUSTODIAN
U.S. Bank National Association
U.S. Bank Center
180 East Fifth Street
St. Paul, Minnesota 55101
ADMINISTRATOR
SEI Investments Management Corporation
Oaks, Pennsylvania 19456
DISTRIBUTOR
SEI Investments Distribution Co.
Oaks, Pennsylvania 19456
TRANSFER AGENT
DST Systems, Inc.
330 West Ninth Street
Kansas City, Missouri 64105
ADDITIONAL COMPENSATION
U.S. Bank and other affiliates of U.S. Bancorp may act as fiduciary with respect
to plans subject to the Employee Retirement Income Security Act of 1974 (ERISA)
and other trust and agency accounts that invest in the funds. As described
above, U.S. Bank may receive compensation for acting as the funds' investment
adviser. In addition, U.S. Bank receives compensation for acting as the
underlying funds' investment adviser. U.S. Bank and its affiliates also receive
compensation from the funds and the underlying funds in connection with the
following:
CUSTODY SERVICES. As compensation for acting as the funds' custodian, U.S. Bank
is paid monthly fees equal, on an annual basis, to 0.03% of a fund's average
daily net assets. In addition, U.S. Bank is reimbursed for its out-of-pocket
expenses incurred while providing custody services to the funds. U.S. Bank also
acts as custodian for the underlying funds and is compensated for its services
at the same rate (except that it receives fees from Emerging Markets Fund and
International Fund equal to 0.10% of each fund's average daily net assets).
SUB-ADMINISTRATION SERVICES. U.S. Bank assists the administrator and provides
sub-administration services to the funds. For providing these services, U.S.
Bank is compensated by the funds' administrator at an annual rate of up to
0.05% of each fund's average daily net assets. U.S. Bank also provides
sub-administration services to the underlying funds and is compensated by the
administrator at the same rate for providing those services.
TRANSFER AGENT SERVICES. U.S. Bank performs certain transfer agent and dividend
disbursing agent services with respect to 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 providing these services. U.S. Bank provides the same
services to the underlying funds and receives the same per account fees from
those funds.
13 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT (CONTINUED)
SECURITIES LENDING SERVICES. In connection with lending their portfolio
securities, the underlying funds pay administrative and custodial fees to U.S.
Bank which are equal to 40% of the underlying funds' income from these
securities lending transactions.
BROKERAGE TRANSACTIONS. When purchasing and selling portfolio securities for
the underlying funds, the investment advisor may place trades through its
affiliates, U.S. Bancorp Investments, Inc. and U.S. Bancorp Piper Jaffray Inc.,
which will earn commissions on such transactions.
SHAREHOLDER SERVICES. To the extent that fund shares are held through U.S. Bank
or its broker-dealer affiliates, U.S. Bancorp Investments, Inc. and U.S.
Bancorp Piper Jaffray Inc., those entities may receive shareholder servicing
fees from the funds' distributor.
PORTFOLIO MANAGEMENT
Each fund's investments are managed by a team of persons associated with First
American Asset Management.
14 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OBJECTIVES
The funds' objectives, which are described in the "Fund Summaries" section, may
be changed without shareholder approval. If a fund's objectives change, you will
be notified at least 30 days in advance. Please remember: There is no guarantee
that any fund will achieve its objectives.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
The funds' main investment strategies are discussed in the "Fund Summaries"
section. These are the strategies that the funds' investment advisor believes
are most likely to be important in trying to achieve the funds' objectives. You
should be aware that each fund may also use strategies and invest in securities
that are not described in this prospectus, but that are described in the
Statement of Additional Information (SAI). For a copy of the SAI, call Investor
Services at 1-888-997-8728.
PORTFOLIO TURNOVER
Each fund had a portfolio turnover rate of over 100% during its last fiscal
year. This resulted from fund mergers that occurred during the fiscal year and
from the addition and deletion of certain underlying funds. Going forward,
however, the funds expect that they generally will have low portfolio turnover
rates. The funds' investment advisor expects to make asset re-allocation
decisions on a monthly basis, although it may make these decisions more
frequently if warranted by market conditions. Although the funds are expected to
have low portfolio turnover rates, the underlying funds may trade securities
frequently, resulting, from time to time, in an annual portfolio turnover rate
of over 100%. Trading of securities may produce capital gains, which are taxable
to shareholders, including the funds, when distributed. Active trading may also
increase the amount of commissions or mark-ups to broker-dealers that the
underlying fund pays when it buys and sells securities. The "Financial
Highlights" section of this prospectus shows each fund's historical portfolio
turnover rate.
15 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS
The objectives, main investment strategies and main risks of the underlying
funds are summarized below. There is no assurance that any of the underlying
funds' investment objectives will be achieved. The investment objectives of the
underlying funds, except for Prime Obligations Fund, may be changed without
shareholder approval.
Additional information about the underlying funds is contained in their
prospectuses and statements of additional information. You can obtain copies of
these documents by writing to SEI Investments Distribution Co., Oaks,
Pennsylvania 19456, or by calling 1-888-997-8728.
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
OBJECTIVE
Large Cap Growth Fund's primary objective is long-term growth of capital.
Current income is a secondary objective of the fund.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Growth Fund invests primarily (at
least 65% of its total assets) in common stocks of companies that have market
capitalizations of at least $5 billion at the time of purchase. The advisor will
select companies that it believes exhibit the potential for superior growth
based on factors such as:
o above average growth in revenue and earnings;
o strong competitive position;
o strong management; and
o sound financial condition.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Large Cap Growth Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
growth stocks and/or large capitalization stocks may underperform the market
as a whole.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risks of adverse currency
fluctuations and of political or social instability or diplomatic
developments that could adversely affect the securities.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
OBJECTIVE
Large Cap Value Fund's primary objective is capital appreciation. Current income
is a secondary objective of the fund.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Large Cap Value Fund invests primarily (at least
65% of its total assets) in common stocks of companies that cover a broad range
of industries and that have market capitalizations of at least $5 billion at the
time of purchase. In selecting stocks, the fund's advisor invests in securities
that it believes:
o are undervalued relative to other securities in the same industry or market;
o exhibit good or improving fundamentals; and
o exhibit an identifiable catalyst that could close the gap between market
value and fair value over the next one to two years.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Large Cap Value Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
value stocks and/or large capitalization stocks may underperform the market
as a whole.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risks of adverse currency
fluctuations and of political or social instability or diplomatic
developments that could adversely affect the securities.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
16 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
- --------------------------------------------------------------------------------
MID CAP GROWTH FUND
OBJECTIVE
Mid Cap Growth Fund has an objective of growth of capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Growth Fund invests primarily (at least
65% of its total assets) in common stocks of mid cap companies, defined as
companies that have market capitalizations at the time of purchase within the
range of the market capitalizations of companies constituting the Russell Midcap
Index. This index measures the performance of the 800 smallest companies in the
Russell 1000 Index (which is made up of the 1,000 largest U.S. companies based
on total market capitalization). As of the date of this prospectus, market
capitalizations of companies included in the Russell Midcap Index ranged from
approximately $118 million to $10.3 billion.
The advisor will select companies that it believes exhibit the potential for
superior growth based on factors such as:
o above average growth in revenue and earnings;
o strong competitive position;
o strong management; and
o sound financial condition.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Mid Cap Growth Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
growth stocks and/or mid cap stocks may underperform the market as a whole.
o Risks of Mid Cap Stocks
While stocks of mid cap companies may be slightly less volatile than those
of small cap companies, they still involve substantial risk and their prices
may be subject to more abrupt or erratic movements than those of larger,
more established companies or the market averages in general.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risks of adverse currency
fluctuations and of political or social instability or diplomatic
developments that could adversely affect the securities.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
MID CAP VALUE FUND
OBJECTIVE
Mid Cap Value Fund has an objective of capital appreciation.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Mid Cap Value Fund invests primarily (at least
65% of total assets) in common stocks of mid cap companies, defined as companies
that have market capitalizations at the time of purchase within the range of the
market capitalizations of companies constituting the Russell Midcap Index. This
index measures the performance of the 800 smallest companies in the Russell 1000
Index (which is made up of the 1,000 largest U.S. companies based on total
market capitalization). As of the date of this prospectus, market
capitalizations of companies included in the Russell Midcap Index ranged from
approximately $118 million to $10.3 billion.
In selecting stocks, the fund's advisor invests in securities it believes:
o are undervalued relative to other securities in the same industry or market;
o exhibit good or improving fundamentals; and
o exhibit an identifiable catalyst that could close the gap between market
value and fair value over the next one to two years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Mid Cap Value Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
value stocks and/or mid cap stocks may underperform the market as a whole.
o Risks of Mid Cap Stocks
While stocks of mid cap companies may be slightly less volatile than those
of small cap companies, they still involve substantial risk and their prices
may be subject to more abrupt or erratic movements than those of larger,
more established companies or the market averages in general.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
17 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
OBJECTIVE
Small Cap Growth Fund has an objective of growth of capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Growth Fund invests primarily (at
least 65% of its total assets) in common stocks of small capitalization
companies, defined as companies that have market capitalizations of less than $1
billion at the time of purchase. The advisor will select companies that it
believes exhibit the potential for superior growth based on factors such as:
o above average growth in revenue and earnings;
o strong competitive position;
o strong management; and
o sound financial condition.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Small Cap Growth Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
growth stocks and/or stocks of small capitalization companies may
underperform the market as a whole.
o Risks of Small Cap Stocks
Stocks of small capitalization companies involve substantial risk. These
stocks historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risks of adverse currency
fluctuations and of political or social instability or diplomatic
developments that could adversely affect the securities.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
OBJECTIVE
Small Cap Value Fund has an objective of capital appreciation.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Small Cap Value Fund invests primarily (at least
65% of its total assets) in common stocks of small capitalization companies,
defined as companies that have market capitalizations of less than $1 billion at
the time of purchase. In selecting stocks, the fund's advisor invests in
securities it believes:
o are undervalued relative to other securities in the same industry or market;
o exhibit good or improving fundamentals; and
o exhibit an identifiable catalyst that could close the gap between market
value and fair value over the next one to two years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Small Cap Value Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market. In addition,
value stocks and/or stocks of small capitalization companies may
underperform the market as a whole.
o Risks of Small Cap Stocks
Stocks of small capitalization companies involve substantial risk. These
stocks historically have experienced greater price volatility than stocks of
larger-capitalization companies, and they may be expected to do so in the
future.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
OBJECTIVE
Equity Income Fund's objective is long-term growth of capital and income.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Equity Income Fund invests primarily (at least
65% of its total assets) in equity securities of companies which the fund's
investment advisor believes are characterized by:
o the ability to pay above average dividends;
o the ability to finance expected growth; and
o strong management.
The fund will attempt to maintain a dividend that will grow quickly enough to
keep pace with inflation. As a
18 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
result, higher-yielding equity securities will generally represent the core
holdings of the fund. However, the fund also may invest in lower-yielding,
higher growth equity securities if the advisor believes they will help balance
the portfolio. The fund's equity securities include common stocks and preferred
stocks and corporate debt securities which are convertible into common stocks.
All securities held by the fund will provide current income at the time of
purchase.
The fund invests in convertible debt securities in pursuit of both long-term
growth of capital and income. The securities' conversion features provide
long-term growth potential, while interest payments on the securities provide
income. The fund may invest in convertible debt securities without regard to
their ratings, and therefore may hold convertible debt securities which are
rated lower than investment grade.
Up to 25% of the fund's total assets may be invested in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Equity Income Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
o Interest Rate Risk
Debt securities typically decrease in value when interest rates rise. This
risk is usually greater for longer-term debt securities.
o Credit Risk
An issuer of debt securities may not make timely principal or interest
payments on its securities, or the other party to a contract (such as a
securities lending agreement) may default on its obligations.
o Risks of Non-Investment Grade Securities
The fund may invest in securities which are rated lower than investment
grade. These securities, which are commonly called "high-yield" securities
or "junk bonds," generally have more volatile prices and carry more risk to
principal than investment grade securities.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risk of political or social
instability or diplomatic developments that could adversely affect the
securities.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND
OBJECTIVE
Real Estate Securities Fund's objective is to provide above average current
income and long-term capital appreciation.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Real Estate Securities Fund invests primarily
(at least 65% of its total assets) in income producing common stocks of publicly
traded companies engaged in the real estate industry. These companies derive at
least 50% of their revenues or profits from the ownership, construction,
management, financing or sale of real estate, or have at least 50% of the fair
market value of their assets invested in real estate. In making investments, the
fund's advisor will attempt to select securities that provide a dividend yield
that exceeds the composite yield of the S&P 500.
A majority of the fund's total assets will be invested in real estate investment
trusts (REITs). REITs are publicly traded corporations or trusts that acquire,
hold and manage residential or commercial real estate. REITs generally can be
divided into the following three types:
o equity REITs, which invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains or
real estate appreciation;
o mortgage REITs, which invest the majority of their assets in real estate
mortgage loans and derive their income primarily from interest payments; and
o hybrid REITs, which combine the characteristics of equity REITs and mortgage
REITs.
The fund expects to emphasize investments in equity REITs, although it may
invest in all three kinds of REITs.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Real Estate Securities Fund include:
o Risks of Common Stocks
Stocks may decline significantly in price over short or extended periods of
time. Price changes may occur in the market as a whole, or they may occur in
only a particular company, industry or sector of the market.
o Risks of the Real Estate Industry
Because the fund invests primarily in the real estate industry, it is
particularly susceptible 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.
o Risk of REITs
There are 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. REITs
19 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
are dependent on specialized management skills which may affect their
ability to generate cash flow for operating purposes and to make
distributions to shareholders or unitholders.
o Risks of Non-Diversification
The fund is non-diversified. This means that it may invest a larger portion
of its assets in a limited number of companies than a diversified fund.
Because a relatively high percentage of the fund's assets may be invested in
the securities of a limited number of issuers, and because those issuers
generally will be in the real estate industry, the fund's portfolio
securities may be more susceptible to any single economic or regulatory
occurrence than the portfolio securities of a diversified fund.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
OBJECTIVE
Emerging Markets Fund has an objective of long-term growth of capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Emerging Markets Fund invests primarily (at
least 65% of its total assets) in equity securities from the world's emerging
markets. Normally, the fund will invest in securities traded in at least six
foreign countries.
A country is 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:
o those that have an emerging stock market (as defined by the International
Financial Corporation);
o those with low-to middle-income economies (according to the World Bank); and
o those listed in World Bank publications as "developing."
In choosing investments for the fund, the fund's sub-advisor generally places
primary emphasis on country selection. This is followed by the selection of
industries or sectors within or across countries and the selection of individual
stocks within those industries or sectors. The fund is not subject to any
restrictions on the size of the companies in which it invests and it may invest
in smaller capitalization companies.
Equity securities in which the fund invests include common and preferred stock.
In addition, the fund may invest in securities representing underlying
international securities, such as American Depositary Receipts and European
Depositary Receipts, and in securities of other investment companies.
In order to hedge against adverse movements in currency exchange rates, the fund
may enter into forward foreign currency exchange contracts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in Emerging Markets Fund include:
o Risks of Equity Securities
Equity securities may decline significantly in price over short or extended
periods of time. Price changes may occur in the world market as a whole, or
they may occur in only a particular country, company, industry or sector of
the world market.
o Risks of International Investing
International investing involves risks not typically associated with
domestic investing. Because of these risks, and because of the sub-advisor's
ability to invest substantial portions of the fund's assets in a small
number of countries, the fund may be subject to greater volatility than
mutual funds that invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
o Risks of Emerging Markets
The risks of international investing are particularly significant in
emerging markets. Investing in emerging markets generally involves exposure
to economic structures that are less diverse and mature, and to political
systems that are less stable, than those of developed countries. In
addition, issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
o Risks of Smaller Capitalization Companies
Stocks of smaller capitalization companies involve substantial risk and
their prices may be subject to more abrupt or erratic movements than those
of larger, more established companies or of market averages in general.
o Risks of Foreign Currency Hedging Transactions
If the sub-advisor's forecast of exchange rate movements is incorrect, the
fund may realize losses on its foreign currency transactions. In addition,
the fund's hedging transactions may prevent the fund from realizing the
benefits of a favorable change in the value of foreign currencies.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
20 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
OBJECTIVE
International Fund has an objective of long-term growth of capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, International Fund invests primarily (at least
65% of its total assets) in equity securities that trade in markets other than
the United States. These securities generally are issued by companies:
o that are domiciled in countries other than the United States; or
o that derive at least 50% of either their revenues or their pre-tax income
from activities outside of the United States.
Normally, the fund will invest in securities traded in at least three foreign
countries.
In choosing investments for the fund, the fund's sub-advisor generally places
primary emphasis on country selection. This is followed by the selection of
industries or sectors within or across countries and the selection of individual
stocks within those industries or sectors. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
fund also has the ability to invest in emerging markets and smaller
capitalization companies.
Equity securities in which the fund invests include common and preferred stock.
In addition, the fund may invest in securities representing underlying
international securities, such as American Depositary Receipts and European
Depositary Receipts, and in securities of other investment companies.
In order to hedge against adverse movements in currency exchange rates, the fund
may enter into forward foreign currency exchange contracts.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
MAIN RISKS
The main risks of investing in International Fund include:
o Risks of Equity Securities
Equity securities may decline significantly in price over short or extended
periods of time. Price changes may occur in the world market as a whole, or
they may occur in only a particular country, company, industry or sector of
the world market.
o Risks of International Investing
International investing involves risks not typically associated with
domestic investing. Because of these risks, and because of the sub-advisor's
ability to invest substantial portions of the fund's assets in a small
number of countries, the fund may be subject to greater volatility than
mutual funds that invest principally in domestic securities. Risks of
international investing include adverse currency fluctuations, potential
political and economic instability, limited liquidity and volatile prices of
non-U.S. securities, limited availability of information regarding non-U.S.
companies, investment and repatriation restrictions, and foreign taxation.
o Risks of Emerging Markets
The risks of international investing are particularly significant in
emerging markets. Investing in emerging markets generally involves exposure
to economic structures that are less diverse and mature, and to political
systems that are less stable, than those of developed countries. In
addition, issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
o Risks of Smaller Capitalization Companies
Stocks of smaller capitalization companies involve substantial risk and
their prices may be subject to more abrupt or erratic movements than those
of larger, more established companies or of market averages in general.
o Risks of Foreign Currency Hedging Transactions
If the sub-advisor's forecast of exchange rate movements is incorrect, the
fund may realize losses on its foreign currency transactions. In addition,
the fund's hedging transactions may prevent the fund from realizing the
benefits of a favorable change in the value of foreign currencies.
o Risks of Securities Lending
The fund is subject to the risk that the other party to a securities lending
agreement will default on its obligations.
- --------------------------------------------------------------------------------
FIXED INCOME FUND
OBJECTIVE
Fixed Income Fund's objective is to provide investors with high current income
consistent with limited risk to capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, Fixed Income Fund invests in investment grade
debt securities, such as:
o U.S. government securities, (securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities), including zero coupon
securities;
o mortgage- and asset-backed securities; and
o fixed and floating rate corporate debt obligations.
Fund managers select securities using a "top-down" approach, which begins with
the formulation of their general economic outlook. Following this, various
sectors and industries are analyzed and selected for investment. Finally, fund
managers select individual securities within these sectors or industries.
Debt securities in the fund will be rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
advisor. At least 65% of the fund's debt securities must be either U.S.
government securities or securities that have received at least an A or
equivalent rating. Unrated securities will not exceed 25% of the fund's total
assets.
21 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
At least 65% of the fund's total assets will be invested in fixed rate
obligations. The fund may invest up to 15% of its total assets in foreign
securities payable in U.S. dollars.
Under normal market conditions the fund attempts to maintain a weighted average
maturity for its portfolio securities of 15 years or less and an average
effective duration of three to eight years.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions. In a dollar roll transaction, the fund sells mortgage-backed
securities for delivery in the current month while contracting with the same
party to repurchase similar securities at a future date.
MAIN RISKS
The main risks of investing in Fixed Income Fund include:
o Interest Rate Risk
Debt securities typically decrease in value when interest rates rise. This
risk is usually greater for longer-term debt securities.
One measure of interest rate risk is effective duration, which measures how
much the value of a security is expected to change with a given change in
interest rates. The longer a security's effective duration, the more
sensitive its price to changes in interest rates. For example, if interest
rates were to increase by one percentage point, the market value of a bond
with an effective duration of five years would decrease by 5%, with all
other factors being constant. However, all other factors are rarely
constant. Effective duration is based on assumptions and subject to a number
of limitations. It is most useful when interest rate changes are small,
rapid and occur equally in short-term and long-term securities. In addition,
it is difficult to calculate precisely for bonds with prepayment options,
such as mortgage-related securities, because the calculation requires
assumptions about prepayment rates. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-related securities can be greatly affected by changes in interest
rates.
o Income Risk
The fund's income could decline due to falling market interest rates.
o Credit Risk
An issuer of debt securities may not make timely principal or interest
payments on its securities, or the other party to a contract (such as a
securities lending agreement) may default on its obligations.
o Call Risk
During periods of falling interest rates, a bond issuer may "call" -- or
repay -- its high-yielding bonds before their maturity date. The fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
o Risks of Mortgage- and Asset-Backed Securities
Falling interest rates could cause faster than expected prepayments of the
obligations underlying mortgage- and asset-backed securities, which the fund
would have to invest at lower interest rates. On the other hand, rising
interest rates could cause prepayments of the obligations to decrease,
extending the life of mortgage- and asset-backed securities with lower
interest rates.
o Foreign Security Risk
Securities of foreign issuers, even when dollar-denominated and publicly
traded in the United States, may involve risks not associated with the
securities of domestic issuers, including the risks of adverse currency
fluctuations and of political or social instability or diplomatic
developments that could adversely affect the securities.
o Risks of Dollar Roll Transactions
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
OBJECTIVE
Strategic Income Fund's objective is to provide investors with a high level of
current income.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, the fund invests primarily (at least 65% of its
total assets) in a combination of:
o securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities and investment grade debt obligations issued by domestic
issuers;
o high-yield (non-investment grade) debt obligations issued by domestic
issuers and U.S. dollar denominated high-yield debt obligations issued by
foreign issuers; and
o investment grade and non-U.S. dollar denominated high-yield debt obligations
issued by foreign governments and other foreign issuers.
Based upon historical returns, the fund's advisor expects these three categories
of investments to have different returns and risks under similar market
conditions. The advisor relies on the differences in the expected performance of
each category to manage risks by allocating the fund's portfolio among the three
categories. The advisor also seeks to enhance the fund's performance by
allocating more of its portfolio to the category that the advisor expects to
offer the best balance between risk and return. Normally, the fund's assets will
be invested in each of these three categories, with no more than 50% invested in
any one category. However, the fund may from time to time invest up to 100% of
its total assets in any one category if the advisor believes it will help the
fund achieve its objective without undue risk to principal.
The fund's foreign investments may include investments in emerging markets.
22 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
The fund's investments may include securities which do not pay interest
currently, such as zero coupon securities and delayed interest securities. The
fund also may invest in payment-in-kind bonds, where interest is paid in other
securities rather than cash.
In addition to debt obligations, the fund may invest in preferred stock and in
equity securities including common stock, convertible securities and warrants.
These investments may be denominated in U.S. dollars or foreign currencies.
There is no minimum rating requirement for securities in which the fund may
invest. In addition, there is no limitation on the average maturity or average
effective duration of securities held by the fund.
To generate additional income, the fund may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions. It also may invest up to 25% of total assets in dollar roll
transactions. In a dollar roll transaction, the fund sells mortgage-backed
securities for delivery in the current month while contracting with the same
party to repurchase similar securities at a future date.
MAIN RISKS
The main risks of investing in Strategic Income Fund include:
o Risks of High-Yield Securities
A significant portion of the fund's portfolio may consist of lower-rated
debt obligations, which are commonly called "high-yield" securities or "junk
bonds." High-yield securities generally have more volatile prices and carry
more risk to principal than investment grade securities.
o Risks of Foreign Securities
Investing in foreign securities involves risks not typically associated with
U.S. investing. Risks of foreign investing include adverse currency
fluctuations, potential political and economic instability, limited
liquidity and volatile prices of non-U.S. securities, limited availability
of information regarding non-U.S. companies, investment and repatriation
restrictions and foreign taxation.
o Risks of Emerging Markets
The fund may invest in emerging markets, where the risks of foreign
investing are higher. Investing in emerging markets generally involves
exposure to economic structures that are less diverse and mature, and to
political systems that are less stable, than those of developed countries.
In addition, issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
o Interest Rate Risk
Debt securities typically decrease in value when interest rates rise. This
risk is usually greater for longer-term debt securities.
o Income Risk
The fund's income could decline due to falling market interest rates.
o Credit Risk
An issuer of debt securities may not make timely principal or interest
payments on its securities, or the other party to a contract (such as a
securities lending agreement) may default on its obligations.
o Call Risk
During periods of falling interest rates, a bond issuer may "call" -- or
repay -- its high-yielding bonds before their maturity date. The fund would
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the fund's income.
o Market Risk
The fund's investments may include common stock and warrants to purchase, or
securities convertible into, common stocks. Stocks may decline significantly
in price over short or extended periods of time. Price changes may occur in
the market as a whole, or they may occur in only a particular company,
industry or sector of the market.
o Risks of Mortgage-Backed Securities
Falling interest rates could cause faster than expected prepayments of the
mortgages underlying mortgage-backed securities, which the fund would have
to invest at lower interest rates. On the other hand, rising interest rates
could cause prepayments of the mortgages to decrease, extending the life of
mortgage-backed securities with lower interest rates.
o Risks of Common Stocks
The fund's investments may include common stock and warrants to purchase, or
securities convertible into, common stocks. Stocks may decline significantly
in price over short or extended periods of time. Price changes may occur in
the market as a whole, or they may occur in only a particular company,
industry or sector of the market.
o Risks of Dollar Roll Transactions
The use of mortgage dollar rolls could increase the volatility of the fund's
share price. It could also diminish the fund's investment performance if the
advisor does not predict mortgage prepayments and interest rates correctly.
- --------------------------------------------------------------------------------
PRIME OBLIGATIONS FUND
OBJECTIVE
Prime Obligations Fund seeks maximum current income to the extent consistent
with preservation of capital and maintenance of liquidity.
MAIN INVESTMENT STRATEGIES
Prime Obligations Fund invests in high-quality short-term debt obligations,
including:
o securities issued by the U.S. government or one of its agencies or
instrumentalities;
o U.S. dollar-denominated obligations of domestic and foreign banks with total
assets of at least $500 million (including fixed and variable rate
certificates of deposit, time deposits and bankers' acceptances);
o commercial paper;
o non-convertible corporate debt securities;
o loan participation interests; and
o repurchase agreements for the securities in which the fund may invest.
23 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
THE UNDERLYING FUNDS (CONTINUED)
When selecting securities for the fund, the portfolio managers use a "top-down"
approach, looking first at general economic factors and market conditions, then
at individual securities.
The fund may invest up to 25% of its total assets in dollar-denominated
obligations of U.S. branches of foreign banks which are subject to the same
regulation as U.S. banks. The fund also may invest up to 25% of its total
assets, collectively, in dollar-denominated obligations of foreign branches of
domestic banks, foreign banks and foreign corporations.
MAIN RISKS
The main risks of investing in Prime Obligations Fund include:
o Although the fund seeks to preserve the value of a shareholder's investment
at $1.00 per share, it is possible to lose money by investing in the fund. A
major change in interest rates or a default on a security or repurchase
agreement held by the fund could cause the value of an investment in the
fund to decline.
o The level of income a shareholder receives from the fund will be affected by
movements in short-term interest rates.
o Foreign securities in which the fund invests, although dollar denominated,
may present some additional risk. Political or social instability or
diplomatic developments could adversely affect the securities. There is also
the risk of possible withholding taxes, seizure of foreign deposits,
currency controls, interest limitations, or other governmental restrictions
which might affect the payment of principal or interest on securities owned
by the fund. In addition, there may be less public information available
about foreign corporations and foreign banks and their branches.
24 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about the shares of each
fund. This information is intended to help you understand each fund's financial
performance for the past five years or, if shorter, the period of the fund's
operations. Some of this information reflects financial results for a single
fund share. Total returns in the tables represent the rate that you would have
earned or lost on an investment in a fund, assuming you reinvested all of your
dividends and distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the funds' financial statements, is included
in the funds' annual report, which is available upon request.
AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1997(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 12.58 $ 10.00
------- --------
Investment Operations:
Net Investment Income 0.20 0.11
Net Gains (Losses) on Investments
(both realized and unrealized) (1.42) 2.58
------- --------
Total From Investment Operations (1.22) 2.69
------- --------
Less Distributions:
Dividends (from net investment income) (0.20) (0.11)
Distributions (from capital gains) (0.05) --
------- --------
Total Distributions (0.25) (0.11)
------- --------
Net Asset Value, End of Period $ 11.11 $ 12.58
======= ========
Total Return (9.85)% 27.06%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $62,635 $ 13,725
Ratio of Expenses to Average Net Assets(1) 0.25% 0.60%(3)
Ratio of Net Income to Average Net Assets 1.66% 0.76%(3)
Ratio of Expenses to Average Net Assets (excluding waivers)(1) 0.87% 2.85%(3)
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) 1.04% (1.49)%(3)
Portfolio Turnover Rate 152% 7%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1)Expense ratios do not include expenses of the underlying funds.
(2)Commenced operations on October 1, 1996.
(3)Annualized.
25 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1997(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 12.12 $ 10.00
------- ---------
Investment Operations:
Net Investment Income 0.28 0.18
Net Gains (Losses) on Investments
(both realized and unrealized) (0.98) 2.12
------- ---------
Total From Investment Operations (0.70) 2.30
------- ---------
Less Distributions:
Dividends (from net investment income) (0.28) (0.18)
Distributions (from capital gains) (0.09) --
------- ---------
Total Distributions (0.37) (0.18)
------- ---------
Net Asset Value, End of Period $ 11.05 $ 12.12
======= =========
Total Return (5.95)% 23.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $65,656 $ 15,676
Ratio of Expenses to Average Net Assets(1) 0.25% 0.60%(3)
Ratio of Net Income to Average Net Assets 2.33% 1.61%(3)
Ratio of Expenses to Average Net Assets (excluding waivers)(1) 0.89% 2.62%(3)
Ratio of Net Income (Loss) to Average Net Assets (excluding waivers) 1.69% (0.41)%(3)
Portfolio Turnover Rate 143% 6%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1)Expense ratios do not include expenses of the underlying funds.
(2)Commenced operations on October 1, 1996.
(3)Annualized.
26 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1997(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 11.76 $ 10.00
-------- --------
Investment Operations:
Net Investment Income 0.35 0.26
Net Gains (Losses) on Investments
(both realized and unrealized) (0.59) 1.76
-------- --------
Total From Investment Operations (0.24) 2.02
-------- --------
Less Distributions:
Dividends (from net investment income) (0.35) (0.26)
Distributions (from capital gains) (0.09) --
-------- --------
Total Distributions (0.44) (0.26)
-------- --------
Net Asset Value, End of Period $ 11.08 $ 11.76
======== ========
Total Return (2.18)% 20.47%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $207,907 $ 27,565
Ratio of Expenses to Average Net Assets(1) 0.25% 0.60%(3)
Ratio of Net Income to Average Net Assets 3.05% 2.59%(3)
Ratio of Expenses to Average Net Assets (excluding waivers)(1) 0.82% 2.10%(3)
Ratio of Net Income to Average Net Assets (excluding waivers) 2.48% 1.09%(3)
Portfolio Turnover Rate 158% 37%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1)Expense ratios do not include expenses of the underlying funds.
(2)Commenced operations on October 1, 1996.
(3)Annualized.
27 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS (CONTINUED)
INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1997(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 10.82 $ 10.00
-------- --------
Investment Operations:
Net Investment Income 0.50 0.41
Net Gains (Losses) on Investments
(both realized and unrealized) 0.43 0.82
-------- --------
Total From Investment Operations 0.93 1.23
-------- --------
Less Distributions:
Dividends (from net investment income) (0.50) (0.41)
Distributions (from capital gains) (0.02) --
-------- --------
Total Distributions (0.52) (0.41)
-------- --------
Net Asset Value, End of Period $ 11.23 $ 10.82
======== ========
Total Return 8.72% 12.51%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $116,779 $ 36,119
Ratio of Expenses to Average Net Assets(1) 0.25% 0.60%(3)
Ratio of Net Income to Average Net Assets 4.63% 4.39%(3)
Ratio of Expenses to Average Net Assets (excluding waivers)(1) 0.84% 2.00%(3)
Ratio of Net Income to Average Net Assets (excluding waivers) 4.04% 2.99%(3)
Portfolio Turnover Rate 106% 29%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1)Expense ratios do not include expenses of the underlying funds.
(2)Commenced operations on October 1, 1996.
(3)Annualized.
28 PROSPECTUS - FIRST AMERICAN STRATEGY FUNDS
<PAGE>
FOR MORE INFORMATION
More information about the funds is available in the funds' Statement of
Additional Information and annual and semiannual reports.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the funds and their policies. A current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into this prospectus by reference (which means that it is legally considered
part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal year.
You can obtain a free copy of the funds' SAI and/or free copies of the funds'
most recent annual or semiannual reports by calling Investor Services at
1-888-997-8728. The material you request will be sent by first-class mail or
other means designed to ensure equally prompt delivery, within three business
days of receipt of the request.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.
Information about the funds is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.
SEC file number: 811-07687
FASF-3000 (2/1999)
<PAGE>
Part B
FIRST AMERICAN STRATEGY FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 1, 1999
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 February
1, 1999. 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION....................................................................................1
INVESTMENT RESTRICTIONS OF THE FUNDS...................................................................1
ADDITIONAL INFORMATION CONCERNING INVESTMENTS
BY THE FUNDS AND THE UNDERLYING FUNDS..................................................................2
Short-Term Investments........................................................................3
Repurchase Agreements.........................................................................4
When-Issued and Delayed Delivery Transactions.................................................4
Lending of Portfolio Securities...............................................................5
Options Transactions..........................................................................5
Futures and Options on Futures................................................................7
Securities of Foreign Banks and Branches......................................................8
Foreign Securities............................................................................8
Foreign Currency Transactions................................................................10
REIT Securities..............................................................................11
Mortgage-Backed Securities...................................................................12
Asset-Backed Securities......................................................................15
Debt Obligations.............................................................................15
Debt Obligations Rated Less Than Investment Grade............................................15
U.S. Government Securities...................................................................16
Zero Coupon Securities.......................................................................16
Floating Rate Corporate Debt Obligations.....................................................16
Fixed Rate Corporate Debt Obligations........................................................16
Participation Interests......................................................................17
Fixed Income Securities -- Equity Funds......................................................17
Payment-In-Kind Debentures and Delayed Interest Securities...................................17
Preferred Stock..............................................................................18
Loan Participations; Section 4(2) and Rule 144A Securities...................................18
Credit Enhancement Agreements................................................................18
Money Market Funds...........................................................................18
INVESTMENT RESTRICTIONS OF THE UNDERLYING FUNDS.......................................................19
Restrictions Applicable to the Equity Funds, Strategic Income Fund and Fixed Income Fund.....19
Restrictions Applicable to Prime Obligations Fund............................................20
DIRECTORS AND EXECUTIVE OFFICERS......................................................................22
Directors....................................................................................22
Executive Officers...........................................................................22
Compensation.................................................................................23
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS..................................................24
Investment Advisory Agreement................................................................24
Administration Agreement.....................................................................25
Distributor and Shareholder Service Plan and Agreement.......................................26
Custodian; Transfer Agent; Counsel; Accountants..............................................26
INVESTMENT ADVISORY SERVICES FOR THE UNDERLYING FUNDS.................................................27
Investment Advisory Agreements of the Underlying Funds.......................................27
Sub-Advisory Agreements for Emerging Markets Fund, International Fund
and Strategic Income Fund....................................................................28
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE....................................................29
CAPITAL STOCK.........................................................................................30
NET ASSET VALUE AND PUBLIC OFFERING PRICE.............................................................32
FUND PERFORMANCE......................................................................................32
SEC Standardized Performance Figures.........................................................32
Non-Standard Distribution Rates..............................................................34
Certain Performance Comparisons..............................................................34
TAXATION..............................................................................................34
ADDITIONAL INFORMATION ABOUT SELLING SHARES...........................................................35
By Telephone.................................................................................35
By Mail ....................................................................................36
Redemption Before Purchase Instruments Clear.................................................36
RATINGS...............................................................................................36
Ratings of Corporate Debt Obligations and Municipal Bonds....................................37
Ratings of Preferred Stock...................................................................38
Ratings of Commercial Paper..................................................................39
Best's Rating System for Insurance Companies.................................................39
FINANCIAL STATEMENTS..................................................................................40
</TABLE>
-ii-
<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." Each
of the Funds are open-end diversified investment companies.
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.
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.
<PAGE>
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.
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 restriction is non-fundamental and may be changed by
FASF's Board of Directors without shareholder vote. None of the Funds will
invest more than 15% of its net assets in all forms of illiquid investments.
ADDITIONAL INFORMATION CONCERNING INVESTMENTS
BY THE FUNDS AND THE UNDERLYING FUNDS
The main investment strategies of the Funds and the Underlying Funds
are set forth in such Funds' Prospectus. Additional information concerning such
main investment strategies and other investment strategies 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."
A percentage limitation on investments by an Underlying Fund stated in
this section or in "Investment Restrictions of the Underlying Fund" is adhered
to at the time of an investment, a later increase or decrease in percentage
resulting from changes in asset value will not be deemed to violate the
limitation except in the case of the limitations on illiquid investment and
borrowing. 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, 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
-2-
<PAGE>
Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's")
and Moody's Investors Services, Inc. ("Moody's") are contained in "Ratings"
below.
SHORT-TERM INVESTMENTS
The Funds and the Underlying Funds can invest in a variety of
short-term instruments which are specified in their respective Prospectuses and
Statement of Additional Information. Short-term investments may be entered into
on a joint basis by the Funds, the Underlying Funds, and other funds advised by
the U.S. Bank National Association, the Fund's investment advisor ("U.S. Bank"
or the "Advisor"). These short-term investments include short-term obligations
such as rated commercial paper and variable amount master demand notes; United
states dollar-denominated time and savings deposits (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. The other mutual funds in which the Funds and the Underlying Funds
may so invest include money market funds advised by the Advisor, subject to
certain restrictions contained in an exemptive order issued by the Securities
and Exchange Commission ("SEC") with respect thereto.
The bank instruments in which Fixed Income Fund and Strategic Income
Fund invests may 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. 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.
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 their respective Prospectus and Statement of Additional
Information, 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 Emerging
Markets Fund, International Fund and Strategic Income Fund, their respective
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.
-3-
<PAGE>
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, 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 or, in the case of Emerging Markets
Fund and International Fund, their respective sub-advisor will monitor the
creditworthiness of the firms with which the Underlying Funds enter into
repurchase agreements. In the case of Strategic Income Fund, the Advisor and the
Fund's investment sub-advisor will monitor the creditworthiness of the firms
with which such Underlying Fund enters into repurchase agreements.
The Underlying Funds' custodian will hold the securities underlying any
repurchase agreement, or the securities will be part of the Federal
Reserve/Treasury Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
under the repurchase agreement (including any accrued interest), the appropriate
Underlying Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
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.
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 such Underlying 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.
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 sufficient to meet its purchase
-4-
<PAGE>
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
investment advisor or sub-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 total 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 total assets.
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 Emerging Markets Fund,
International Fund and Strategic Income Fund, their respective investment
sub-advisor has determined are creditworthy under guidelines established by the
Board of Directors. In these loan arrangements, 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. 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. 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.
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Underlying Funds, other than
Prime Obligations Fund, may purchase put and call options. Each of the
Underlying Funds other than Prime Obligations Fund may purchase put and call
options on securities and stock indices. Strategic Income Fund may purchase
options on interest rate indices. Emerging Markets Fund, International Fund and
Strategic Income Fund may purchase options on foreign currencies. Options on
futures contracts are discussed below under "-- Futures and Options on Futures."
OPTIONS ON SECURITIES. 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.
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.
OPTIONS ON STOCK INDICES. Options on stock 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 a stock 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.
-5-
<PAGE>
In particular, 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.
OPTION 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.
WRITING OF CALL OPTIONS. The Underlying Funds other than Prime
Obligations Fund may write (sell) covered call options to the extent specified
with respect to particular Underlying Funds as set forth herein. 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 Emerging
Markets Fund, International Fund and Strategic Income Fund) on foreign
currencies which an Underlying Fund owns or has the right to acquire or on
interest rate indices. These Underlying Funds (other than Emerging Markets Fund
and International Fund) may write (sell) covered call options covering up to 25%
of the equity securities owned by such Underlying Funds and, in the case of
Emerging Markets Fund and International Fund, covering up to 50% of the equity
securities owned by such Underlying Funds. Strategic Income Fund may write
(sell) covered call options on equity securities covering up to 25% of its net
assets.
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 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 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.
The Equity Funds and Strategic Income Fund also may write call options
on indices, the movements of which generally correlate with those of such
respective Underlying 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 Underlying Fund's portfolio securities.
LIMITATIONS. None of the Underlying Funds other than Mid Cap Growth
Fund, Emerging Markets Fund and International Fund will invest more than 5% of
the value of its total assets in purchased options, provided that options
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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.
FUTURES AND OPTIONS ON FUTURES
The Funds, as well as Fixed Income Fund, Emerging Markets Fund,
International Fund and Strategic Income Fund, may engage in futures transactions
and purchase options on futures. The Funds may purchase futures and options on
futures contracts on securities. Emerging Markets Fund, International Fund and
Strategic Income Fund may purchase futures and options on futures contracts on
securities, stock indices or 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.
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.
The Funds may use futures contracts and options or futures in order to
remain effectively fully invested. In addition, these investment techniques may
be used in order 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.
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 Emerging Market Fund's and International 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
Internal Revenue Code of 1986, as amended (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
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into futures contracts obligating it to sell securities or currencies (as is the
case with respect only to Emerging Markets Fund, International Fund and
Strategic Income Fund), its potential losses are unlimited if it does not own
the securities or currencies covered by the contracts and it is unable to close
out the contracts prior to the settlement date.
A Fund or Underlying Fund may lose the expected benefit of futures
transactions if interest rates, securities prices or foreign exchange rates move
in an unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund or Underlying Fund had not entered into any
futures transactions. In addition, the value of an Underlying Fund's futures
positions may not prove to be perfectly or even highly correlated with the value
of its portfolio securities and foreign currencies, limiting the Fund's or
Underlying Fund's ability to hedge effectively against interest rate, foreign
exchange rate and/or market risk and giving rise to additional risks. Because of
the low margin requirements in the futures markets, they may be subject to
market forces, including speculative 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.
SECURITIES OF FOREIGN BANKS AND BRANCHES
Prime Obligations Fund may invest in obligations of foreign branches of
United States banks and United States branches of foreign banks. Various
provisions of federal law governing the establishment and operation of domestic
branches do not apply to foreign branches of domestic banks. Obligations of
United States branches of foreign banks may be general obligations of the parent
bank in addition to the issuing branch, or may be limited by the terms of a
specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office.
Because the portfolio of Prime Obligations Fund's investments in
taxable money market securities may contain securities of foreign branches of
domestic banks, foreign banks, and United States branches of foreign banks, such
Underlying Fund may be subject to additional investment risks that are different
in some respects from those incurred by a fund that invests only in debt
obligations of United States banks. These risks may include future unfavorable
political and economic developments and possible withholding taxes, seizure of
foreign deposits, currency controls, interest limitations, or other governmental
restrictions which might affect the payment of principal or interest on
securities owned by such Underlying Fund. Additionally, there may be less public
information available about foreign banks and their branches. The Advisor
carefully considers these factors when making investments. Prime Obligation Fund
has agreed that, in connection with investment in securities issued by foreign
banks, United States branches of foreign banks, and foreign branches of domestic
banks, consideration will be given to the domestic marketability of such
securities in light of these factors.
FOREIGN SECURITIES
GENERAL. Under normal market conditions Emerging Markets Fund and
International 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 and Strategic
Income Fund also may invest in Eurodollar Certificates of Deposit, Eurodollar
Time Deposits and Yankee Certificates of Deposit as described under "-- Short-
Term Instruments" above.
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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.
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, the Equity Funds 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. Emerging Markets Fund, International 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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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 Emerging Markets Fund, International Fund and Strategic Income Fund
may be uninvested. In addition, settlement problems could cause Emerging Markets
Fund, International Fund or Strategic Income 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 an Underlying Fund to obtain or
to enforce a judgment against the issuer.
FOREIGN CURRENCY TRANSACTIONS
Emerging Markets Fund, International 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. Emerging Markets Fund, International Fund and
Strategic Income Fund also will incur costs in converting United States dollars
to local currencies, and vice versa.
Emerging Markets Fund, International 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 an amount of a specific currency at a specified price on a future date
agreed upon by the parties. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
Emerging Markets Fund, International Fund and Strategic Income Fund may
enter into forward currency contracts in order to hedge against adverse
movements in exchange rates between currencies. These Underlying Funds may
engage in "transaction hedging" to protect against a change in the foreign
currency exchange rate between the date the Underlying Fund contracts 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 its 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. Emerging Markets fund, International Fund and Strategic
Income Fund also may hedge foreign currency exchange rate risk by engaging in
currency futures and options transactions.
Although a foreign currency hedge may be effective in protecting the
Underlying Fund from losses resulting from unfavorable changes in exchange rates
between the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Underlying Fund from favorable changes in
exchange rates. The applicable Underlying Fund's investment sub-advisor's
decision whether to enter into currency hedging transactions will depend in part
on its view regarding the direction and amount in which exchange rates are
likely to move. The forecasting of movements in exchange rates is extremely
difficult, so that it is highly uncertain whether a hedging strategy, if
undertaken, would be successful. To the extent that their respective investment
sub-advisor's view regarding future exchange rates proves to have been
incorrect, Emerging Markets Fund, International Fund and Strategic Income Fund
may realize losses on their foreign currency transactions.
As stated above, Emerging Markets Fund, International Fund and
Strategic Income Fund may engage in a variety of foreign currency transactions
in connection with their 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. These Underlying Funds will not enter
into such forward contracts or maintain a net exposure in such contracts where
the Underlying Funds would be obligated to deliver an amount of foreign currency
in excess of the value of the Underlying Fund's securities or other assets
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denominated in that currency. The Underlying Funds will comply with applicable
SEC announcements requiring them to segregate assets to cover the Underlying
Fund's 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. The
Underlying Funds generally will not enter into a forward contract with a term
longer than one year except that Strategic Income Fund will not enter into a
forward contract with a term longer than six months.
FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of their financial futures
transactions, Emerging Markets Fund, International 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 Underlying
Funds may be able to achieve many of the same objectives as through investing in
forward foreign currency exchange contracts.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the option period. A call option
gives its owner the right, but not the obligation, to buy the currency, while a
put option gives its owner the right, but not the obligation, to sell the
currency. The option seller (writer) is obligated to fulfill the terms of the
option sold if it is exercised. However, either seller or buy 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 Emerging Markets Fund, International Fund or 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 an Underlying Fund were holding securities
denominated in an appreciating foreign currency and had purchased a foreign
currency put to hedge against a decline in the value of the currency, it would
not have to exercise its put. In such an event, however, the amount of the
Underlying Fund's gain would be offset in part by the premium paid for the
option. Similarly, if an Underlying Fund entered into a contract to purchase a
security denominated in a foreign currency and purchased a foreign currency call
to hedge against a rise in the value of the currency between the date of
purchase and the settlement date, the Underlying Fund would not need to exercise
its call if the currency instead depreciated in value. In such a case, the
Underlying 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.
REIT SECURITIES
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.
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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, by
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.
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 private mortgage pass-through securities and
in Real Estate Mortgage Investment Conduits ("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. GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The guarantee of GNMA
with respect to GNMA certificates is backed by the full faith and credit of the
United States, and GNMA is authorized to borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with no limitation
as to amount, to perform its guarantee.
FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.
The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
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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. 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.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities
and are issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable loans.
Since Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Funds will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
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. The applicable Underlying Funds 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 or applicable investment sub-advisor.
Because CMOs are debt obligations of private entities, payments on CMOs
generally are not obligations of or guaranteed by any governmental entity, and
their ratings and creditworthiness typically depend, among other factors, on the
legal insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy.
CMOs generally are issued in multiple classes, with holders of each
class entitled to receive specified portions of the principal payments and
prepayments and/or of the interest payments on the underlying mortgage loans.
These entitlements can be specified in a wide variety of ways, so that the
payment characteristics of various classes may differ greatly from one another.
For instance, holders may hold interests in CMO tranches called Z-tranches which
defer interest and principal payments until one or other classes of the CMO have
been paid in full. In addition, for example:
* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.
* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage
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loans, thus providing a greater (but not absolute) degree of
certainty as to the schedule upon which principal will be
repaid.
* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.
* As discussed above with respect to Agency Pass-Through
Certificates, an interest-only class of CMOs entitles the
holder to receive all of the interest and none of the
principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.
* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.
* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Internal Revenue 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 mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. None of the
applicable Underlying Funds will invest more than 10% of their total fixed
income assets in interest-only, principal-only, inverse interest only or inverse
floating rate mortgage-backed securities.
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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 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.
DEBT OBLIGATIONS
Fixed Income Fund and Strategic Income Fund may invest in both
investment grade and non-investment grade (lower-rated) bonds (which may be
denominated in U.S. dollars or non-U.S. currencies) and other debt obligations
issued by domestic and foreign corporations and other private issuers. There are
no minimum rating requirements for these investments by the Fund. Fixed Income
Fund's and 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. From time to time, the Fixed Income Fund's and
Strategic Income Fund's portfolio may consist primarily of lower-rated (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." Certain debt
obligations in which the Fund invests may involve equity characteristics. The
Funds may, for example, invest in unit offerings that combine debt securities
and common stock equivalents such as warrants, rights and options. It is
anticipated that the majority of the value attributable to the unit will relate
to its debt component.
The prices and yields of non-investment grade securities generally
fluctuate more than investment grade securities, and such prices may decline
significantly.
DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE
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."
Participation in non-investment grade securities globally involves
greater returns in the form of higher average yields. 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
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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.
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
Underlying 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 GNMA
mortgage-backed securities are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the FNMA or 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.
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. 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.
FLOATING RATE CORPORATE DEBT OBLIGATIONS
Fixed Income Fund may invest in floating rate securities. Strategic
Income Fund expects to invest in floating rate corporate debt obligations,
including increasing 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.
FIXED RATE CORPORATE DEBT OBLIGATIONS
Fixed Income Fund and Strategic 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
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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.
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 of 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.
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 "-- Short-Term Investments." 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
Equity Funds' investment 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.
The fixed income securities specified above are subject to (i) interest
rate risk (the risk that increases in market interest rates will cause declines
int he value of debt securities held by an Underlying Fund); (ii) credit risk
(the risk that the issuers of debt securities held by an Underlying Fund default
in making required payments); and (iii) call or prepayment risk (the risk that a
borrower may exercise the right to prepay a debt obligation before its stated
maturity, requiring an Underlying Fund to reinvest the prepayment at a lower
interest rate).
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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PREFERRED STOCK
The Equity Funds 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.
Although Fixed Income Fund will not make direct purchases of common or
preferred stocks or rights to acquire common or preferred stocks, it may invest
in debt securities which are convertible into or exchangeable for, or which
carry warrants or other rights to acquire, such stocks. Equity interest 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.
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 Underlying Fund's investment 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 are deemed to be 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 Prime Obligations Fund's
investment 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.
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 investment advisor. Investments by the
Underlying 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.
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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.
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 except that Strategic Income
Fund may borrow up to one-third of its total assets and pledge
up to 15% of its total assets to secure such borrowings. None
of 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,
Emerging Markets Fund, International 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 Income Fund, Real Estate
Securities Fund, Small Cap Growth Fund, International Fund and
Strategic Income Fund may invest in mortgage-backed
securities.
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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 restriction is 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 invest more than 15% of its net
assets in all forms of illiquid investments.
For determining compliance with its investment restriction relating to
industry concentration, each such Underlying Fund classifies asset-backed
securities in its portfolio in separate industries based upon a combination of
the industry of the issuer or sponsor and the type of collateral. The industry
of the issuer or sponsor and the type of collateral will be determined by the
Underlying Fund's investment 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
Underlying 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 "Fund Summaries"
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.
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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.
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 "Additional Information Concerning
Investments by the Funds and the Underlying Funds" above and
"Fund Summaries" in the 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.
In addition, 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 maintains an average
weighted maturity of not more than 90 days, and that it invests only in United
States dollar-denominated investments that meet specified credit quality
standards.
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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 FAF since December 1994 and of First American Investment Funds, Inc.
("FAIF") since September 1994 and of First American Strategy Funds, Inc.
("FASF") since June 1996; Chairman (1989-1993) and Chief Executive Officer
(1993-present), Okabena Company (private family investment office). Age: 55.
Roger A. Gibson, 1020 15th Street, Ste. 41A, Denver, Colorado 80202:
Director of FAF, FAIF 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 and the Mountain Region in
Denver, Colorado; employee at United Airlines since 1967. Age: 51.
David T. Bennett, 3400 City Center, 33 South Sixth Street, Minneapolis,
Minnesota 55402: Director of FAIF, FAF and FASF since August 1998; Of Counsel,
Gray, Plant, Mooty, Mooty & Bennett P.A. Prior to August 1998, Mr. Bennett
served as a director of Piper Funds Inc., Piper Funds Inc. II, Piper Global
Funds Inc., Piper Institutional Funds Inc., and various other Piper closed-end
investment companies. Age 56.
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: 50.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAF and FAIF since November 1993 and of FASF since June 1996;
President and owner of Executive 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: 56.
* 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: 63.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; 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: 57.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; 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: 53.
EXECUTIVE OFFICERS
Mark Nagle, SEI Investments Company, Oaks, Pennsylvania 19456;
President of FAIF, FAF and FASF since September 1998; Vice President of the
Administrator and Distributor since November 1996; Vice President of Fund
Accounting, BISYS Fund Services, Inc., from November 1995 to November 1996;
Senior Vice President, Fidelity Investments, prior to November 1995. Age: 40.
-22-
<PAGE>
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: 45.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania 19456;
Controller and Assistant Treasurer of FAIF, FAF and FASF since December 1997;
Associate Director, Fund 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: 33.
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: 35.
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: 51.
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: 41.
James R. Foggo, SEI Investments Company, Oaks, Pennsylvania 19456; Vice
President and Assistant Secretary of FAIF, FAF and FASF since September 1998;
Vice President and Assistant Secretary of the Administrator and Distributor
since September 1998; Associate Attorney, Paul, Weiss, Rifkind, Wharton and
Garrison from January 1998 to August 1998; Associate Attorney, Baker & McKenzie
from January 1995 to January 1998. Age: 34.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402; Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 53.
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 $27,000 per year ($40,500 in the case of the
Chair) plus $4,000 ($6,000 in the case of the Chair) per meeting of the Board
attended and $1,200 per committee meeting attended ($1,800 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or a committee chair). In addition, directors may receive a
per diem fee of $1,500 per day plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,500 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, 1998. No executive officer or affiliated person of FASF had
aggregate compensation from FASF in excess of $60,000 during such fiscal year:
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<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- ---------------------------------- --------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $ 857 -0- -0- $ 53,100
Roger A. Gibson, Director 723 -0- -0- 44,800
David T. Bennett, Director 174 -0- -0- 10,750
Andrew M. Hunter III, Director 795 -0- -0- 49,250
Leonard W. Kedrowski, Director 899 -0- -0- 55,700
Robert L. Spies, Director 830 -0- -0- 51,450
Joseph D. Strauss, Director 1,012 -0- -0- 62,675
Virginia L. Stringer, Director 1,162 -0- -0- 72,000
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS
INVESTMENT ADVISORY AGREEMENT
U.S. Bank National Association, 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 September 30, 1998, on a pro forma combined
basis, USB and its consolidated subsidiaries had consolidated assets of
approximately $67.5 billion, consolidated deposits of $48.2 billion and
shareholders' equity of $5.8 billion.
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 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 unless as
otherwise set forth in the Funds' Prospectus. 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
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<PAGE>
end of the fiscal year. This practice would have the effect of lowering a Fund's
overall expense ratio and of increasing yield to investors, or the converse, at
the time such amounts are absorbed or reimbursed, as the case may be.
The 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.
The following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal years ended September 30,
1997 and September 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------------------- --------------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE ADVISORY FEE
BEFORE WAIVERS AFTER WAIVERS* BEFORE WAIVERS AFTER WAIVERS*
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Income Fund $ 33,068 $ 0 $ 213,285 $ 0
Growth and Income Fund 27,869 0 479,289 0
Growth Fund 13,262 0 135,724 0
Aggressive Growth Fund 11,316 0 140,018 0
</TABLE>
* Advisory fees for the period were voluntarily waived by the Advisor. In
addition, the Advisor reimbursed the Funds additional amounts during
this period to comply with total fund operating expense limitations as
previously agreed upon by the Funds and the Advisor.
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. FASF pays to the Administrator an administrative
fee equal to (i) .12% of each Fund's average daily net assets until aggregate
net assets of all Funds exceed $8 billion, and (ii) .105% to the extent
aggregate net assets of all Funds exceed $8 billion.
The Underlying Funds have approved the appointment of USB as a
sub-administrator (the "Sub-Administrator"). The Sub-Administrator assists the
Administrator in the performance of administrative services for the Underlying
Funds.
The following table sets forth administration fees, before waivers and
after waivers, paid by each of the Funds for the fiscal years ended September
30, 1997 and September 30, 1998:
-25-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------------------------- --------------------------------------
ADMINISTRATION FEE ADMINISTRATION ADMINISTRATION FEE ADMINISTRATION FEE
BEFORE WAIVERS FEE AFTER WAIVERS BEFORE WAIVERS AFTER WAIVERS
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Income Fund $ 44,990 $ 44,990 $ 93,890 $ 93,890
Growth and Income Fund 43,464 43,464 210,977 210,977
Growth Fund 40,308 40,308 59,748 59,748
Aggressive Growth Fund 39,740 39,740 61,662 61,662
</TABLE>
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 years ended September 30, 1997 and September 30,
1998:
SHAREHOLDER SERVICING FEES
--------------------------
YEAR ENDED SEPTEMBER 30,
1997 1998
------------ -----------
Income Fund $ 33,069 $ 213,285
Growth and Income Fund 27,869 479,289
Growth Fund 13,262 135,724
Aggressive Growth Fund 11,316 140,052
The Distributor received no compensation from the Funds during the last
fiscal year other than shareholder servicing fees as set forth in the above
table. The Distributor also serves as distributor for the shares of the
Underlying Funds and receives compensation (but not with respect to the class of
shares purchased by the Funds) for such services.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Funds' assets is 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.
-26-
<PAGE>
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 (the "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, acted as the Funds' independent auditors, providing audit services
including audits of the annual financial statements and assistance and
consultation in connection with SEC filings for the year ended September 30,
1998. Ernst & Young LP, 1400 Pillsbury Center, Minneapolis, Minnesota 55402,
serves as the Funds' independent auditors providing audit services, including
audits of the annual financial statements and assistance and consultation in
connection with SEC filings for the year ended September 30, 1999.
INVESTMENT ADVISORY SERVICES FOR THE UNDERLYING FUNDS
INVESTMENT ADVISORY AGREEMENTS OF THE UNDERLYING FUNDS
U.S. Bank National Association, the investment 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, Strategic Income Fund 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 Funds. Each such Underlying
Fund other than Emerging Markets Fund and International Fund pays the Advisor
monthly fees calculated on an annual basis equal to 0.70% of its average daily
net assets. Emerging Markets Fund and International Fund pays the Advisor
monthly fees calculated on an annual basis equal to 1.25% of their respective
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.
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
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<PAGE>
$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 EMERGING MARKETS FUND, INTERNATIONAL FUND AND
STRATEGIC INCOME FUND
Marvin & Palmer Associates, Inc. ("Marvin & Palmer"), 1201 North Market
Street, Suite 2300, Wilmington, Delaware 19801, is sub-advisor for Emerging
Markets Fund and International 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 December 31, 1998,
Marvin & Palmer managed a total of approximately $7 billion in investments for
over 61 institutional investors. Pursuant to the Marvin & Palmer Sub-advisory
Agreement, Marvin & Palmer is responsible for the investment and reinvestment of
Emerging Markets Fund's and International 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 Emerging Markets
Fund and International 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 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 investment 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
- -----------------------
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.
-28-
<PAGE>
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, these sub-advisors are collectively 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 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 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 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
-29-
<PAGE>
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
determines 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
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
Each share of each Fund's $.01 par value common stock is fully paid,
nonassessable, and transferable. Shares may be issued as either full or
fractional shares. Fractional shares have pro rata the same rights and
privileges as full shares. Shares of the Funds have no preemptive or conversion
rights.
Each share of a Fund has one vote. On some issues, such as the election
of directors, all shares of all 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
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<PAGE>
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.
As of December 1, 1998, the directors of FASF owned shares of FAIF,
FASF and FAF with an aggregate net asset value of $4.9 million. As of December
1, 1998, the directors and officers of FASF as a group owned less than one
percent of each Fund's outstanding shares. As of January 15, 1999, 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
--------------------------
STRATEGY INCOME FUND
US Bank National Association Cust.
Daily Valued Retirement Programs
Attn: Reconciliation SPFT 0401
180 East 5th Street
St Paul, MN 55101-1631 7.68%
STRATEGY GROWTH FUND
VAR & Co.
P.O. Box 64482
St. Paul, MN 55164-0482 18.72%
US Bank National Association Cust.
Daily Valued Retirement Programs
Attn: Reconciliation SPFT 0401
180 East 5th Street
St Paul, MN 55101-1631 23.32%
US Bank TR US Bancorp CAP
U/A 01-01-1984
180 5th St. E STE SPEN0502
St. Paul, MN 55101-1631 8.04%
STRATEGY GROWTH AND INCOME FUND
VAR & Co.
P.O. Box 64482
St. Paul, MN 55164-0482 26.57%
US Bank National Association Cust.
Daily Valued Retirement Programs
Attn: Reconciliation SPFT 0401
180 East 5th Street
St Paul, MN 55101-1631 12.21%
US Bank TR US Bancorp CAP
U/A 01-01-1984
180 5th St. E STE SPEN0502
St. Paul, MN 55101-1631 15.16%
Wachovia Bank NA
TRST US Bancorp Deferred Comp. TR
DTD 8/1/97
P.O. Box 3073
Winston Salem, NC 27150-0001 15.30%
STRATEGY AGGRESSIVE GROWTH FUND
US Bank National Association Cust.
Daily Valued Retirement Programs
Attn: Reconciliation SPFT 0401
180 East 5th Street
St Paul, MN 55101-1631 37.74%
-31-
<PAGE>
PERCENTAGE OF SHARES OWNED
--------------------------
VAR & Co. 20.06%
P.O. Box 64482
St. Paul, MN 55164-0482
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 "Buying Shares." 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. The following sets forth the net asset value of the Funds as of
September 30, 1998.
<TABLE>
<CAPTION>
NET
ASSET VALUE
NET ASSETS SHARES PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
----------------- ----------------- ----------------
<S> <C> <C> <C>
Income Fund $ 116,779,295 $ 10,396,413 $ 11.23
Growth and Income Fund 207,907,758 18,757,143 11.08
Growth Fund 65,655,923 5,940,617 11.05
Aggressive Growth Fund 62,634,600 5,639,787 11.11
</TABLE>
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, 1998, the yields for
the shares of the Funds were as follows:
Income Fund 3.67%
Growth and Income Fund 2.61%
Growth Fund 2.42%
Aggressive Growth Fund 2.32%
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<PAGE>
Such yield figures are determined by dividing the net investment income
per share earned during the specified 30-day period by the maximum offering
price per share on the last day of the period, according to the following
formula:
Yield = 2 [((a - b) / cd) + 1)6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the
period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period
TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and (ii) deducts all recurring fees, such as advisory fees, charged
as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by finding
the cumulative compounded rate of return over the period indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
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 as of September 30, 1998 were as follows:
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<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN
AS OF SEPTEMBER 30, 1998
---------------------------------------------------------------------
CUMULATIVE SINCE ONE FIVE
SINCE INCEPTION* INCEPTION YEAR YEARS
-------------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Income Fund 22.32% 10.61% 8.72% **
Growth and Income Fund 17.85 8.57 2.18 **
Growth Fund 15.89 7.66 5.95 **
Aggressive Growth Fund 14.55 7.04 9.85 **
</TABLE>
* Inception date of October 1, 1996.
** Not in operation for the entire period.
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, 1998, the historical distribution rates
of the shares of the Funds were as follows:
Income Fund 4.44%
Growth and Income Fund 3.19%
Growth Fund 2.51%
Aggressive Growth Fund 1.80%
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, 1998 for the funds were as follows:
Income Fund 5.65%
Growth and Income Fund 2.99%
Growth Fund 2.20%
Aggressive Growth Fund 1.43%
CERTAIN PERFORMANCE COMPARISONS
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, other industry publications and other entities or organizations
which track the performance of investment companies. The performance of each
Fund may be compared to that of its unmanaged benchmark index and to the
performance of similar funds as reported by Lipper and such other data services.
TAXATION
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.
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
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<PAGE>
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 "Managing
Your Investment -- Exchanging Shares" in the Prospectus), such exchange will be
considered a taxable sale of the shares being exchanged.
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.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the
privilege on the initial shareholder application, by calling his or her
financial 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 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.
-35-
<PAGE>
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 $25,000 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.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through
the Automated Clearing House, the proceeds of redemptions of those shares are
not available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.
RATINGS
A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.
When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Underlying Funds are not
required to dispose of a security if its rating declines after it is purchased,
although they may consider doing so.
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<PAGE>
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.
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,
-37-
<PAGE>
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.
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:
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<PAGE>
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
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.
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.
BEST'S RATING SYSTEM FOR INSURANCE COMPANIES
The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.
The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.
Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.
Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+
-39-
<PAGE>
(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, 1998 are incorporated herein by reference. Such
annual report to shareholders accompanies this Statement of Additional
Information.
-40-
<PAGE>
FIRST AMERICAN STRATEGY FUNDS, INC.
PART C -- OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended and Restated Articles of Incorporation, as filed June
19, 1996 (Incorporated by reference to Exhibit (1) to initial
filing.)
(b) Bylaws of Registrant (Incorporated by reference to Exhibit (2)
to initial filing.)
(c) Not applicable
(d) Form of Investment Advisory Agreement between the Registrant
and First Bank National Association (Incorporated by reference
to Exhibit (5) to initial filing.)
(e) Form of Distribution Agreement between the Registrant and SEI
Financial Services Company (Incorporated by reference to
Exhibit (6) initial filing.)
(f) Not applicable
(g)(1) Form of Custodian Agreement between the Registrant and First
Trust National Association including form of Compensation
Agreement pursuant thereto (Incorporated by reference to
Exhibit (8) to initial filing.)
(g)(2) Assignment of Custodian Agreements and Security Lending Agency
Agreement to U.S. Bank National Association, dated May 1, 1998
(Incorporated by reference to Exhibit (g)(2) to Post-Effective
Amendment No. 4.)
(h)(1) Administration Agreement between the Registrant and SEI
Financial Management Corporation (Incorporated by reference to
Exhibit (9)(a) to initial filing.)
(h)(2) Form of Assignment of Transfer Agency Agreement to DST
Systems, Inc. [superseded] (Incorporated by reference to
Exhibit (9)(b) to Post-Effective Amendment No. 2.)
(h)(3) Form of Shareholder Service Plan and Agreement between
Registrant and SEI Financial Services Company (Incorporated by
reference to Exhibit 9(c) to initial filing.)
(h)(4) Agreement dated July 1, 1997 between SEI and First Bank
National Association (Incorporated by reference to Exhibit
(9)(d) to Post-Effective Amendment No. 3.)
(h)(5) Amended and Restated Administration Agreement, dated July 1,
1997, by and between the Registrant and SEI Investments
Management Corporation (Incorporated by reference to Exhibit
(9)(e) to Post-Effective Amendment No. 3.)
(h)(6) Sub-Administration Agreement effective January 1, 1998 by and
between SEI and First Bank National Association (Incorporated
by reference to Exhibit (9)(f) to Post-Effective Amendment No.
3.)
(h)(7) Agreement dated July 1, 1997, by and between First Bank
National Association and SEI Investments Management
Corporation (Incorporated by reference to Exhibit (9)(g) to
Post-Effective Amendment No. 3.)
C-1
<PAGE>
(i)(1) Opinion and Consent of Dorsey & Whitney, dated January 26,
1982 [superseded] (Incorporated by reference to Exhibit (10)
to initial filing.)
* (j) Consent of KPMG Peat Marwick
(k) Not applicable
(l) Investment Letter for Initial Shares of the respective Series
(Incorporated by reference to Exhibit (13) to initial filing.)
(m) Not applicable
* (n) Financial Data Schedule
(o) Not Applicable
* Filed herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner, under such circumstances, and to the full extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereafter amended, and any rules, regulations, or releases promulgated
thereunder.
Section 302A.521 of the Minnesota Statutes, as now enacted, provides that
a corporation shall indemnify a person made or threatened to be made a party to
a proceeding by reason of the former or present official capacity of the person
against judgments, penalties, fines, settlements and reasonable expenses,
including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of the
person complained of in the proceeding, the person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
reasonable expenses incurred by the person in connection with the proceeding
with respect to the same acts or omissions; acted in good faith, received no
improper personal benefit, and the Minnesota Statutes dealing with directors'
conflicts of interest, if applicable, have been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe that the conduct was
unlawful; and reasonably believed that the conduct was in the best interests of
the corporation or, in certain circumstances, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
The Registrant undertakes that no indemnification or advance will be made
unless it is consistent with Sections 17(h) or 17(i) of the Investment Company
Act of 1940, as now enacted or hereafter amended, and Securities and Exchange
Commission rules, regulations, and releases (including, without limitation,
Investment Company Act of 1940 Release No. 11330, September 2, 1980).
Insofar as the indemnification for liability arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore,
C-2
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Registrant's investment adviser, U.S.
Bank National Association (the "Manager"), is described in the section of each
series' Statement of Additional Information, filed as part of this Registration
Statement, entitled "Investment Advisory and Other Services." The directors and
officers of the Manager are listed below, together with their principal
occupation or other positions of a substantial nature during the past two fiscal
years.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES OTHER POSITIONS AND OFFICES
NAME WITH THE MANAGER AND PRINCIPAL BUSINESS ADDRESS
---- ---------------- ------------------------------
<S> <C> <C>
John F. Grundhofer Chairman, President and Chief Chairman, President and Chief
Executive Officer Executive Officer of U.S. Bancorp*
Richard A. Zona Director and Vice Chairman--Finance Vice Chairman--Finance of U.S.
Bancorp*
Philip G. Heasley Director and Vice Chairman Vice Chairman and Group Head of the
Retail Product Group of U.S. Bancorp*
J. Robert Hoffmann Director, Chief Credit Officer Executive Vice President and Chief
and Executive Vice President Credit Officer of U.S. Bancorp*
Lee R. Mitau Director, General Counsel, Executive Vice President, Secretary,
Executive Vice President and Secretary and General Counsel of U.S. Bancorp*
Susan E. Lester Director, Executive Vice President and Executive Vice President and Chief
Chief Financial Officer Financial Officer of U.S. Bancorp*
Robert D. Sznewajs Director and Vice Chairman Vice Chairman of U.S. Bancorp*
Gary T. Duim Director and Vice Chairman Vice Chairman of U.S. Bancorp*
</TABLE>
- ----------------
* Address: 601 Second Avenue South, Minneapolis, Minnesota 55402.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) State the name of each investment company (other than the
Registrant) for which each principal underwriter currently distributing the
Registrant's securities also acts as a principal underwriter, distributor or
investment adviser:
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor") acts as distributor for SEI Liquid Asset Trust, SEI Daily Income
Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI Institutional International Trust, The Advisors' Inner Circle Fund, Pillar
Funds, CUFund,
C-3
<PAGE>
STI Classic Funds, CoreFunds, Inc., First American Funds, Inc., First American
Investment Funds, Inc., The Arbor Fund, Boston 1784 Funds, PBHG Funds, Inc.,
Marquis Funds, Morgan Grenfell Investment Trust, The Achievement Funds Trust,
Bishop Street Funds, CrestFunds, Inc., STI Classic Variable Trust, ARK Funds,
Monitor Funds, SEI Asset Allocation Trust, Expedition Funds, TIP Funds, SEI
Institutional Investments Trust, First American Strategy Funds, Inc., Highmark
Funds, Armada Funds, PBHG Insurance Series Fund, Inc., TIP Institutional Funds,
Oak Associates Funds and The Nevis Funds, Inc., pursuant to distribution
agreements dated November 29, 1982, July 15, 1982, December 3, 1982, July 10,
1985, January 22, 1987, August 30, 1988, November 14, 1991, February 28, 1992,
May 1, 1992, May 29, 1992, October 30, 1992, November 1, 1992, November 1, 1992,
January 28, 1993, June 1, 1993, July 16, 1993, August 17, 1993, January 3, 1994,
December 27, 1994, January 27, 1995, March 1, 1995, August 18, 1995, November 1,
1995, January 11, 1996, April 1, 1996, April 29, 1996, June 14, 1996, October 1,
1996, February 15, 1997, March 8, 1997, April 1, 1997, June 9, 1997, January 1,
1998, February 27, 1998 and June 29, 1998, respectively.
The Distributor provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments. These services
include portfolio evaluation, performance measurement, and consulting services
("Funds Evaluation") and automated execution, clearing and settlement of
securities transactions ("MarketLink").
(b) Provide the information required by the following table for each
director, officer, or partner of each principal underwriter named in the
response to Item 20. Unless otherwise noted, the business address of each
director or officer is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH UNDERWRITER POSITIONS AND OFFICES WITH REGISTRANT
- ---- -------------------------------------- -------------------------------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief --
Executive Officer
Henry H. Greer Director --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President, President -
Investment Services Division --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Financial Officer & Treasurer --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchinson Senior Vice President --
Jack May Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
Kevin P. Robins Senior Vice President & General Counsel Vice President & Assistant Secretary
Patrick K. Walsh Senior Vice President --
Ronert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
S. Courtney E. Collier Vice President & Assistant Secretary Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
James R. Foggo Vice President & Assistant Secretary
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant Secretary
Greg Gettinger Vice President & Assistant Secretary --
</TABLE>
C-4
<PAGE>
<TABLE>
<S> <C> <C>
Jeff Jacobs Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President President
Joanne Nelson Vice President --
Joseph M. O'Donnell Vice President & Assistant Secretary Vice President & Assistant Secretary
Sandra K. Orlow Vice President & Secretary Vice President & Assistant Secretary
Cynthia M. Parrish Vice President & Assistant Secretary --
Donald Pepin Vice President & Managing Director --
Kim Rainey Vice President --
Rob Redecan Vice President --
Maria Reinhart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary --
Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant Secretary
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
C-5
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement under Rule
485(b) of the Securities Act of 1933, as amended, and has duly caused this
Post-Effective Amendment to its Registration Statement No. 333-7463 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Oaks, Commonwealth of Pennsylvania, on the 29th day of January, 1999.
FIRST AMERICAN STRATEGY FUNDS, INC.
ATTEST: /s/ Michael G. Beattie By: /s/ James R. Foggo
--------------------------------- -------------------------------
Michael G. Beattie James R. Foggo
Vice President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement has been signed below by
the following persons in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael G. Beattie Controller (Principal **
- ------------------------------ Financial and Accounting Officer)
Michael G. Beattie
* Director **
- ------------------------------
David T. Bennett
* Director **
- ------------------------------
Robert J. Dayton
* Director **
- ------------------------------
Andrew M. Hunter III
* Director **
- ------------------------------
Leonard W. Kedrowski
* Director **
- ------------------------------
Robert L. Spies
* Director **
- ------------------------------
Joseph D. Strauss
* Director **
- ------------------------------
Virginia L. Stringer
* Director **
- ------------------------------
Roger A. Gibson
* By: /s/ James R. Foggo
-------------------------
James R. Foggo
Attorney-in-Fact
** January 29, 1999
C-6
EXHIBIT (j)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First American Strategy Funds, Inc.:
We consent to the use of our report dated November 13, 1998 incorporated by
reference herein and to the references to our Firm under the headings "Financial
Highlights" in Part A and "Custodian; Transfer Agent; Counsel; Accountants" in
Part B of the Registration Statement.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
January 29, 1999
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<EXPENSES-NET> 480
<NET-INVESTMENT-INCOME> 5851
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<EXPENSES-NET> (214)
<NET-INVESTMENT-INCOME> 3956
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</TABLE>
