INSTITUTIONAL CLASS
PROSPECTUS
FIRST AMERICAN MUTUAL FUNDS
680 EAST SWEDESFORD ROAD, WAYNE, PENNSYLVANIA 19087
The Class C (or "Institutional Class") shares offered by this prospectus
represent interests in the following portfolios (each a "Fund") of First
American Mutual Funds (the "Trust"), an open-end, management investment
company (a mutual fund):
DIVERSIFIED GROWTH FUND
EQUITY INCOME FUND
MANAGED INCOME FUND
LIMITED TERM TAX FREE INCOME FUND
Class C shares are offered to banks and certain other institutions for the
investment of their own funds or funds for which they act in a fiduciary,
agency or custodial capacity. Class A and Class B shares of the Funds are not
offered by this prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF
ITS AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN INVESTMENT IN
A FUND INVOLVES INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF PRINCIPAL, DUE
TO FLUCTUATIONS IN THE FUND'S NET ASSET VALUE.
This prospectus contains the information you should read and know before you
invest in the Funds. Keep this prospectus for future reference.
Each Fund has also filed a Statement of Additional Information dated August
2, 1994 with the Securities and Exchange Commission. The information
contained in the Statements of Additional Information is incorporated by
reference into this prospectus. You may request a copy of any Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Funds by calling (800) 637-2548, or by writing SEI
Financial Management Corporation, 680 East Swedesford Road, Wayne,
Pennsylvania 19087.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 2, 1994
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
<S> <C>
Fees and Expenses 3
Financial Highlights 5
General Information 6
Investment Information 6
First American Mutual Funds Information 20
Administration of the Funds 21
Net Asset Value 22
Purchases and Redemptions of Shares 22
Shareholder Information 24
Effect of Banking Laws 25
Tax Information 26
Performance Information 27
</TABLE>
FEES AND EXPENSES
CLASS C
<TABLE>
<CAPTION>
Limited Term
Diversified Equity Managed Tax Free
Growth Income Income Income
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases None None None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None None None None
Dividends (as a percentage of offering
price)
Deferred Sales Load None None None None
Redemption Fee None None None None
Exchange Fee None None None None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.40% 0.40% 0.31% 0.30%
12b-1 Fees None None None None
Total Other Expenses (after waiver)(1) 0.35% 0.35% 0.29% 0.30%
TOTAL FUND OPERATING EXPENSES (AFTER
WAIVER)(2) 0.75% 0.75% 0.60% 0.60%
(1) The estimated management fees and total other expenses have been reduced
to reflect anticipated voluntary waivers by the investment adviser and the
administrator. The adviser and the administrator can terminate these
voluntary waivers at any time in their sole discretion. The maximum
management fee and administrative fee for each Fund is 0.70% and 0.20%,
respectively, absent the anticipated voluntary waivers by the adviser and the
administrator. Total other expenses absent such waivers are estimated to be
0.40% for Diversified Growth Fund, 0.40% for Equity Income Fund, 0.34% for
Managed Income Fund, and 0.35% for Limited Term Tax Free Income Fund.
(2) The Annual Fund Operating Expenses in the table above are based on
estimated annualized expenses expected during the fiscal period ending
September 30, 1994 (the Funds' new fiscal year end). Absent the anticipated
voluntary waivers described above in note (1), Total Annual Fund Operating
Expenses for Class C shares are estimated to be 1.10% for Diversified Growth
Fund, 1.10% for Equity Income Fund, 1.04% for Managed Income Fund and 1.05%
for Limited Term Tax Free Income Fund.
* Expenses in this table are estimated based on average annualized expenses
expected to be incurred by Class C shares during the fiscal period ending
September 30, 1994. During the course of this period, expenses may be more or
less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A CLASS C SHAREHOLDER OF THE FUNDS WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "FIRST AMERICAN MUTUAL FUNDS INFORMATION" AND
"INVESTING IN THE FUNDS."
</TABLE>
<TABLE>
<CAPTION>
Limited Term
Diversified Equity Managed Tax Free
Growth Income Income Income
Example Fund Fund Fund Fund
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment in Class C shares,
assuming
(1) 5% annual return, and (2) redemption at
the end of each time period:
1 year $ 8 $ 8 $ 6 $ 6
3 years $24 $24 $19 $19
5 years $42 $42 $33 $33
10 years $93 $93 $75 $75
</TABLE>
Absent fee waivers, the dollar amounts for the 1, 3, 5 and 10 year periods
above would be $11, $35, $61, and $134 for Diversified Growth Fund; $11, $35,
$61 and $134 for Equity Income Fund; $11, $33, $57 and $127 for Managed
Income Fund; and $11, $33, $58 and $128 for Limited Term Tax Free Income
Fund.
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED ANNUALIZED DATA FOR THE FISCAL PERIOD ENDING
SEPTEMBER 30, 1994.
FINANCIAL HIGHLIGHTS
YEAR ENDED NOVEMBER 30, 1993*
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information relates only to the Class A shares of the Funds. No
Class B or Class C shares were outstanding during the year ended November 30,
1993.
<TABLE>
<CAPTION>
Limited Term
Diversified Equity Managed Tax Free
Growth Income Income Income
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.11 0.57 0.61 0.18
Net realized and unrealized (0.63) (0.14) (0.23) 0.02
loss on investments
Total from investment operations (0.52) 0.43 0.38 0.20
LESS DISTRIBUTIONS
Dividends to shareholders from net (0.09) (0.56) (0.60) (0.17)
investment income
NET ASSET VALUE, END OF PERIOD $ 9.39 $ 9.87 $ 9.78 $ 10.03
TOTAL RETURN** (5.18)% 4.44% 3.88% 2.02%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.78% (a) 0.75% (a) 0.65% (a) .81% (a)
Net investment income 1.26% (a) 6.09% (a) 6.69% (a) 2.30% (a)
Expense waiver/reimbursement(b) 0.47% (a) 0.61% (a) 42% (a) .95% (a)
SUPPLEMENTAL DATA
Net assets, end of period (000 $31,084 $28,786 $73,748 $19,330
omitted)
Portfolio turnover rate 5% 68% 39% 22%
</TABLE>
* Reflects operations from the respective dates of initial public investment
(December 18, 1992 in the case of Diversified Growth Fund, Equity Income Fund
and Managed Income Fund and February 19, 1993 in the case of Limited Term Tax
Free Income Fund) to November 30, 1993. With respect to Managed Income Fund,
for the period from the start of business, November 17, 1992 to December 18,
1992, net investment income aggregating $0.03 per share ($273) was
distributed to Federated Administrative Services.
** Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above.
Further information about the Funds' performance is contained in the Funds'
annual reports dated November 30, 1993, which can be obtained free of charge.
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated August 3, 1992. The Declaration of Trust permits
the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in
any one portfolio may be offered in separate classes.
The Funds are designed primarily for retail and trust customers of First Bank
National Association and its affiliates as a convenient means of
participating in a professionally managed, diversified portfolio of debt
instruments. In most cases, a minimum initial investment of $1,000 is
required.
Fund shares are sold through three separate classes, Class A and Class B (the
"Retail Classes") and Class C (the "Institutional Class"), which provide for
variations in sales charges, distribution costs, voting rights and dividends,
and which may be available to different groups of investors. Except for these
differences among classes, each share of a Fund represents an undivided,
proportionate interest in the Fund.
Only Class C shares are offered by means of this prospectus. Class C shares
are offered to banks and certain other institutions for the investment of
their own funds or funds for which they act in a fiduciary, agency or
custodial capacity.
INVESTMENT INFORMATION
The investment objectives and policies of each of the four Funds are set
forth in the following sections. These sections should be read in conjunction
with the sections captioned "Investment Techniques and Risk Factors" and
"Investment Limitations" which follow the descriptions of investment
objectives and policies.
The investment objectives of each Fund cannot be changed without the approval
of that Fund's shareholders. While there is no assurance that any Fund will
achieve its investment objectives, each Fund endeavors to do so by following
the investment policies described in this prospectus.
DIVERSIFIED GROWTH FUND
OBJECTIVES.
The primary investment objective of Diversified Growth Fund is to achieve
long-term growth of capital. The Fund's secondary objective is to provide
income.
INVESTMENT POLICIES.
Under normal market conditions, Diversified Growth Fund will invest at least 80%
of its total assets in equity securities (including common stocks and securities
convertible into or carrying warrants to purchase common stock) of issuers
believed by the Adviser to be characterized by sound management and the ability
to finance expected growth.
Diversified Growth Fund will invest in equity securities of a diverse group of
companies to provide representation across all economic sectors included in the
S&P 500 Composite Stock Index. The Adviser will overweight the Fund's portfolio
holdings in sectors believed by the Adviser to provide above average total
return potential and underweight the Fund's holdings in those sectors that the
Adviser believes have a lower total return potential. Within a given sector, the
Fund's assets will be invested in securities of those companies that, in the
Adviser's judgment, exhibit a combination of above average growth in revenue and
earnings, strong management and sound and improving financial condition.
Diversified Growth Fund may also invest up to 20% of its total assets in debt
securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, nonconvertible preferred stocks, corporate bonds, notes,
warrants and short-term obligations (with maturities of 12 months or less)
consisting of commercial paper (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, repurchase agreements, and demand
and time deposits of banks and saving and loan associations. Investments in
corporate debt securities and nonconvertible preferred stocks will be limited to
securities which are rated at their time of purchase not less than Baa (or
equivalent short-term rating) by Moody's Investor Services, Inc. ("Moody's") or
BBB (or equivalent short-term rating) by Standard & Poor's Corporation
("Standard & Poor's") or another nationally recognized statistical rating
organization, or which are unrated but determined by the Adviser to be of
comparable quality. Securities rated Baa by Moody's or BBB by Standard & Poor's
have speculative characteristics and may have somewhat greater risk of default
than higher rated bonds. A description of Moody's and Standard & Poor's quality
ratings is set forth in the Statement of Additional Information. If any security
invested in by the Fund loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to sell or otherwise dispose of
the security, but may consider doing so. During temporary defensive periods as
determined by the Adviser, the Fund may hold up to 100% of its total assets in
short-term obligations of the types described above. However, to the extent that
the Fund is so invested, it will not be pursuing its investment objective during
that time.
Subject to the foregoing policies, Diversified Growth Fund may also invest up to
25% of its total assets in foreign debt and equity securities, either directly
or through the purchase of American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"). The Fund may invest in foreign debt securities
that meet the foregoing quality criteria and may be issued by foreign
governments, their agencies or instrumentalities, supranational entities or by
foreign corporations. The Fund may also invest in securities issued by foreign
branches of U.S. banks and foreign banks, in Canadian commercial paper and in
Europaper (U.S. dollar denominated commercial paper of a foreign issuer). Bank
instruments may include Eurodollar Certificates of Deposit issued by foreign
branches of U.S. or foreign banks; Eurodollar Time Deposits, which are U.S.
dollar-denominated deposits in foreign branches of U.S. or foreign banks, and
Yankee Certificates of Deposit, which are U.S. dollar-denominated certificates
of deposit issued by U.S. branches of foreign banks and held in the United
States. For a discussion of the risks associated with investments in foreign
securities, see "Investment Techniques and Risk Factors -- About Investing in
Foreign Securities."
EQUITY INCOME FUND
OBJECTIVE.
The investment objective of Equity Income Fund is to achieve long-term growth of
capital and income.
INVESTMENT POLICIES.
Under normal market conditions, Equity Income Fund will invest at least 80% of
its total assets in equity securities (including common stocks and securities
convertible into or carrying warrants to purchase common stock) of issuers
believed by the Adviser to be characterized by sound management and the ability
to finance expected growth and the ability to pay above average dividends.
Equity Income Fund intends to invest in equity securities that have relatively
high dividend yields, and which, in the Adviser's opinion, will result in a
relatively stable Fund dividend with a growth rate sufficient to maintain the
purchasing power of the income stream. Although the Adviser anticipates that
higher yielding equity securities will generally represent the core holdings of
the Fund, the Fund may invest in lower yielding but higher growth equity
securities to the extent that the Adviser believes such investments are
appropriate to achieve portfolio balance. All securities held by the Fund will
provide current income consistent with the Fund's investment objective of
long-term growth of capital and income.
Equity Income Fund may also invest up to 20% of its total assets in debt
securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, nonconvertible preferred stocks, corporate bonds, notes,
warrants and short-term obligations (with maturities of 12 months or less)
consisting of commercial paper (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, repurchase agreements, and demand
and time deposits of banks and saving and loan associations. Investments in
corporate debt securities and nonconvertible preferred stocks will be limited to
securities which are rated at their time of purchase not less than Baa (or
equivalent short-term rating) by Moody's or BBB (or equivalent short-term
rating) by Standard & Poor's or another nationally recognized statistical rating
organization, or which are unrated but determined by the Adviser to be of
comparable quality. Securities rated Baa by Moody's or BBB by Standard & Poor's
have speculative characteristics and may have somewhat greater risk of default
than higher rated bonds. A description of Moody's and Standard & Poor's quality
ratings is set forth in the Statement of Additional Information. If any security
invested in by the Fund loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to sell or otherwise dispose of
the security, but may consider doing so. During temporary defensive periods as
determined by the Adviser, the Fund may hold up to 100% of its total assets in
short-term obligations of the types described above. However, to the extent that
the Fund is so invested, it will not be pursuing its investment objective during
that time.
Subject to the foregoing policies, Equity Income Fund may also invest up to 25%
of its total assets in foreign debt and equity securities, either directly or
through the purchase of ADRs or EDRs. The Fund may invest in foreign debt
securities that meet the foregoing quality criteria and may be issued by foreign
governments, their agencies or instrumentalities, supranational entities or by
foreign corporations. The Fund may also invest in securities issued by foreign
branches of U.S. banks and foreign banks, in Canadian commercial paper and in
Europaper (U.S. dollar denominated commercial paper of a foreign issuer). Bank
instruments may include Eurodollar Certificates of Deposit issued by foreign
branches of U.S. or foreign banks; Eurodollar Time Deposits, which are U.S.
dollar-denominated deposits in foreign branches of U.S. or foreign banks, and
Yankee Certificates of Deposit, which are U.S. dollar-denominated certificates
of deposit issued by U.S. branches of foreign banks and held in the United
States. For a discussion of the risks associated with investments in foreign
securities, see "Investment Techniques and Risk Factors -- About Investing in
Foreign Securities."
MANAGED INCOME FUND
OBJECTIVES.
The investment objective of Managed Income Fund is to provide current income
while attempting to provide a high degree of principal stability.
INVESTMENT POLICIES.
Managed Income Fund invests in a portfolio of investment grade securities, at
least 65% of which will normally consist of U.S. Government obligations and
corporate debt obligations and mortgage related securities rated in one of the
four highest categories by a nationally recognized statistical rating
organization referred to below. A description of the ratings categories is
contained in the Statement of Additional Information. The Fund's portfolio
securities will have a weighted average maturity of six months to two years.
The permitted investments include notes, bonds, and discount notes of U.S.
Government agencies or instrumentalities; domestic issues of corporate debt
obligations having floating or fixed rates of interest and rated Aaa, Aa, A, or
Baa by Moody's; AAA, AA, A, or BBB by Standard & Poor's, or AAA, AA, A, or BBB
by Fitch Investors Service, Inc. ("Fitch"), or which are of comparable quality
in the judgment of the Adviser; other investments including mortgage-related
securities rated in one of the four highest categories by a nationally
recognized statistical rating organization listed above or which are of
comparable quality in the judgment of the Adviser; rated commercial paper which
matures in 270 days or less so long as at least two ratings of such paper are
high quality ratings by nationally recognized statistical rating organizations
(such ratings would include: Prime-1 or Prime-2 by Moody's, A-1 or A-2 by
Standard & Poor's, or F-1 or F-2 by Fitch); time and savings deposits, deposit
notes and bankers acceptances (including certificates of deposit) in commercial
or savings banks whose accounts are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund, both of which are administered by the
Federal Deposit Insurance Corporation ("FDIC"), including certificates of
deposit issued by and other time deposits in foreign branches of FDIC insured
banks or which have at least $100,000,000 in capital; and repurchase agreements.
If any security invested in by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
Managed Income Fund invests in mortgage-related securities as described below.
Managed Income Fund may invest in obligations representing an undivided interest
in a pool of residential mortgages or collateralized by a pool of residential
mortgages, which obligations are issued or guaranteed by the U.S. Government or
one of its agencies or instrumentalities (such as Government National Mortgage
Association ("GNMA") and the Federal National Mortgage Association ("FNMA"). The
Fund may also invest in collateralized mortgage obligations ("CMOs") and
Adjustable Rate Mortgage Securities ("ARMS") that meet the investment criteria
set forth below. CMOs are bonds issues by single purpose stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers or companies related to the construction industry. ARMS are
pass-through mortgage securities representing interests in adjustable rather
than fixed interest rate mortgages. The Fund will invest only in CMOs which are
rated in the highest rating category by Moody's, Standard & Poor's or Fitch and
are either (i) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest either (a) by an agency or
instrumentality of the U.S. Government or (b) by the issuer, with the guaranty
collateralized by U.S. Government securities, or (ii) securities in which the
proceeds of the issuance are invested in mortgage securities and the payment of
the principal and interest is supported by the credit of an agency of
instrumentality of the U.S. Government. The ARMS in which the Fund may invest
are insured by GNMA, FNMA and the Federal Home Loan Mortgage Corporation, and
are actively traded. See "Investment Techniques and Risk Factors -- About
Mortgage-Related Securities" for a discussion of the risks associated with
investment in mortgage-related securities.
Managed Income Fund may also invest in asset-backed securities, which include
securities secured by company receivables, truck and auto loans, leases, home
equity loans and credit card receivables. Such securities are generally issued
as pass-through certificates which represent undivided interests in the
underlying pools of assets. For a discussion of risks associated with investing
in asset-backed securities, see "InvestmentTechniques and Risk Factors -- About
Asset-Backed Securities."
In addition, Managed Income Fund may invest up to 15% of its total assets in
interest-only, principal-only and inverse floating rate securities. For
information concerning interest-only and principal-only securities and inverse
floating rate securities and the risks associated therewith, see "Investment
Techniques and Risk Factors -- About Mortgage-Related Securities" and "About
Inverse Floating Rate Securities" in this prospectus and the Statement of
Additional Information.
Managed Income Fund may only invest in bank instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund or the Savings Association Insurance Fund.
Bank instruments may include Eurodollar Certificates of Deposit issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits, which are
U.S. dollar-denominated deposits in foreign branches of U.S. or foreign banks,
and Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held in the
United States. Investments in foreign securities may entail certain risks not
associated with investments in securities of U.S. issuers. See "Investment
Techniques and Risk Factors -- About Investing in Foreign Securities" for a
discussion of these risks.
In order to reduce risk, Managed Income Fund may invest in exchange traded
options on interest rate indices and write covered call options on interest rate
indices. See "Investment Techniques and Risk Factors -- About Options
Transactions."
Managed Income Fund may invest up to 15% of its total assets in foreign
securities payable in United States dollars, and in debt securities which are
convertible into or exchangeable or which carry warrants or rights to purchase
common stock or other equity interests. See "Investment Techniques and Risk
Factors -- About Investing in Foreign Securities" for a description of certain
risks which purchasing foreign securities may involve.
Managed Income Fund may also for defensive purposes invest temporarily in cash
and cash items during times of unusual market conditions to maintain liquidity.
Managed Income Fund may also purchase investment-type insurance products such as
Guaranteed Investment Contracts ("GlCs"). A GIC is a deferred annuity under
which the purchaser agrees to pay money to an insurer (either in a lump sum or
in installments) and the insurer promises to pay interest at a guaranteed rate
for the life of the contract. GlCs may have fixed or variable interest rates.
Generally, a GIC allows a purchaser to buy an annuity with the moneys
accumulated under the contract (however, the Fund does not anticipate purchasing
any such annuities). A GIC is a general obligation of the issuing insurance
company. The purchase price paid for a GIC becomes part of the general assets of
the insurer, and the contract is paid at maturity from the general assets of the
insurer. Generally, GlCs are not assignable or transferable without the
permission of the issuing insurance companies. For this reason, an active
secondary market in GlCs does not currently exist nor is an active secondary
market expected to develop. Furthermore, GlCs generally can be redeemed before
maturity only at a substantial discount or penalty. Therefore, GlCs are usually
considered to be illiquid investments. Accordingly, if the purchase of such a
product would result in the total amount invested in such products and all other
illiquid securities exceeding 15% of the Fund's net assets, the purchase shall
not be made. Such products shall be obligations only of insurance companies with
a policyholder's rating of A or better by A.M. Best Company. A description of
these ratings is contained in the Statement of Additional Information.
LIMITED TERM TAX FREE INCOME FUND
OBJECTIVE.
The investment objective of Limited Term Tax Free Income Fund is to provide
dividend income that is exempt from federal regular income tax while attempting
to provide a high degree of principal stability.
INVESTMENT POLICIES.
Limited Term Tax Free Income Fund seeks to achieve its objective by investing,
under normal market conditions, at least 80% of its net assets in municipal
obligations, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax. No more than 20% of the securities owned
by the Fund will generate income that is an item of tax preference for purposes
of the federal alternative minimum tax. See "Tax Information."
Limited Term Tax Free Income Fund may purchase obligations which are rated
(without regard to insurance) no lower than Baa by Moody's or BBB by Standard &
Poor's or which carry an equivalent rating from another nationally recognized
statistical rating organization. Such rated bonds are investment grade; however,
to the extent that the portfolio is invested in bonds rated Baa by Moody's or
BBB by Standard & Poor's or which carry an equivalent rating from another
nationally recognized statistical rating organization, there may be somewhat
greater risk of default, since such bonds have speculative characteristics. At
times the Fund's portfolio may include unrated securities which the Adviser
deems to be of a quality comparable to such Moody's or Standard & Poor's
ratings; provided, however, that such unrated securities may not in the
aggregate exceed 10% of the Fund's assets. The Fund also may invest in municipal
notes rated in the highest rating category by a nationally recognized
statistical rating organization, such as MIG/VMIG 1 by Moody's or SP-1 by
Standard & Poor's. A description of Moody's and Standard & Poor's quality
ratings is set forth in the Statement of Additional Information.
The Fund's portfolio securities will be of a "limited term" in that they will
have an average effective weighted maturity of six months to two years. Such
obligations normally produce lower yields than intermediate-term (3 to 10 years)
or long-term (15 years or longer) obligations while assuming less market
volatility than might be experienced with intermediate or long-term bonds. In
considering average effective maturity, recognition will be given to those
characteristics of specific bonds, including being subject to call before
maturity and being subject to certain types of sinking fund provisions, to
determine the maturity characteristic.
The value of tax-exempt obligations owned by Limited Term Tax Free Income Fund
may be adversely affected by local political and economic conditions and
developments. Adverse conditions in an industry significant to a local economy
could have a correspondingly adverse effect on the financial conditions of local
issuers. Other factors that could affect tax-exempt obligations include a change
in the local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandating additional services).
While the Fund's assets will ordinarily be invested in municipal obligations
(including notes for temporary defensive or liquidity purposes), on occasion the
Fund may temporarily hold short-term securities, other than municipal
obligations, the income from which is taxable. These temporary holdings are
solely for the purpose of managing exceptional in-flows and out-flows of cash or
for temporary defensive purposes to preserve existing portfolio values. Under
normal circumstances, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, in periods of adverse
markets when a temporary defensive position to protect capital is deemed
advisable and practicable, the Fund may have more than 20% of its assets in
temporary taxable investments or cash. Temporary taxable investments will be
made exclusively in the following types of obligations maturing within 13 months
from the date of purchase: (1) obligations of the U.S. Government, its agencies
or instrumentalities; (2) commercial paper rated not less than Prime-1 by
Moody's or A-1 by Standard & Poor's or which carries an equivalent rating from
another nationally recognized statistical rating organization; (3) other
short-term debt securities issued or guaranteed by corporations having
outstanding debt rated not less than Baa by Moody's or BBB by Standard & Poor's
or which have an equivalent rating from another nationally recognized
statistical rating organization; (4) certificates of deposit of domestic
commercial banks subject to regulation by the U.S. Government, or any of its
agencies or instrumentalities, with assets of $500 million or more based on the
most recent published reports; or (5) repurchase agreements with domestic banks
or securities dealers involving any of the securities which the Fund is
permitted to hold. See "Investment Techniques and Risk Factors -- About
Repurchase Agreements.''
If any security invested in by Limited Term Tax Free Income Fund loses its
rating or has its rating reduced after the Fund has purchased it, the Fund is
not required to sell or otherwise dispose of the security, but may consider
doing so.
Limited Term Tax Free Income Fund may also temporarily invest up to 10% of its
net assets in shares of investment companies which invest primarily in
short-term municipal obligations (having maturities not exceeding 13 months).
Such investments are also subject to the advisory fee. Income from such
investments is normally exempt from federal income tax.
Limited Term Tax Free Income Fund may also invest in participations in municipal
lease obligations. Participation interests in municipal leases are undivided
interests in a portion of an obligation in the form of a lease or installment
purchase contract issued by a state or local government to acquire equipment or
facilities. Municipal leases frequently have special risks not normally
associated with general obligation bonds or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Fund has
adopted and follows procedures for determining whether municipal lease
securities purchased by the Fund are liquid and for monitoring the liquidity of
municipal lease securities held in the Fund's portfolio. The procedures require
that a number of factors be used in evaluating the liquidity of a municipal
lease security, including the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, the willingness of dealers to undertake to make a
market in the security, the nature of the marketplace in which the security
trades, and other factors which the Adviser may deem relevant. As described
below under "Investment Techniques and Risk Factors -- Illiquid Securities," the
Fund is subject to limitations on the percentage of illiquid securities it can
hold.
Limited Term Tax Free Income Fund may also invest up to 15% of its total assets
in inverse floating rate obligations and interest-only and principal-only
securities. The interest rate on an inverse floating rate instrument ("inverse
floater") resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Interest-only and principal-only
securities represent the right to receive only the interest payments or only the
principal payments on one or more underlying debt obligations. Where the
underlying debt obligations can be prepaid at the option of the obligor, such
securities may be more interest-rate sensitive than other securities. In such
case, a decrease in market interest rates may cause an increase in the rate at
which the underlying obligations are prepaid, thus reducing the return on the
related interest-only securities and increasing the return on the related
principal-only securities. Substantial prepayments on the underlying obligations
thus can, in some cases, prevent a holder of the related interest-only
securities from recovering its original investment in full.
Limited Term Tax Free Income Fund is subject to certain other investment
restrictions, including restrictions that the Fund will not make an investment
of (a) 25% or more of the value of its total assets (i) in obligations of
issuers located in the same state or (ii) in issuers whose payments are
dependent upon revenues from the same type of activity, other than pollution
control revenue bonds, and (b) more than 10% of the value of its total assets in
shares of investment companies which primarily invest in short-term municipal
obligations. The Fund's investment restrictions are set forth in the Statement
of Additional Information.
Although investments in interest-bearing securities generally are made for the
purpose of receiving a stable stream of income, the prices of such securities
are inversely related to changes in interest rates and, therefore, are subject
to the risk of market price fluctuations. The values of fixed income securities
also may be affected by changes in the credit rating or financial condition of
the issuing entities, general conditions of the municipal bond market, and size
of the particular offering. In addition, longer-term investments tend to
experience greater price volatility than shorter-term investments.
The two general classifications of municipal bonds are "general obligation"
bonds and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. They are usually paid from general revenues of the issuing
governmental entity. Revenue bonds are usually payable only out of a specific
revenue source rather than from general revenues and ordinarily are not backed
by the faith, credit or general taxing power of the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are typically
paid out of rents or other specified payments made to the issuing governmental
entity by the company using or operating the facilities. The most common type of
these obligations are industrial revenue bonds and pollution control revenue
bonds. Industrial revenue bonds are issued by governmental entities to provide
financing aid to community facilities such as hospitals, hotels, business or
residential complexes, convention halls or sport complexes. Pollution control
revenue bonds are issued to provide funding of air, water and solids pollution
control systems for privately operated industrial or commercial facilities.
Occasionally, the funds for payment of such obligations come solely from revenue
generated by operation of the facility. Absent a guarantee by the issuing
governmental entity, revenue bonds for private facilities do not represent a
pledge of credit, general revenues or taxing powers of the issuing governmental
entity and the private company operating the facility is the sole source of
payment of the obligation. This type of revenue bond frequently provides a
higher rate of return than other municipal obligations but entails greater risk
than an obligation which is guaranteed by a governmental unit with taxing power.
Federal income tax laws place substantial limitations on industrial revenue
bonds, and particularly certain specified private activity bonds issued after
August 7, 1986. See "Tax Information." However, the Adviser does not believe
that these limitations will impair the Fund's ability to purchase or sell bonds
in accordance with its objectives and policies. In the future, legislation may
be introduced in Congress which may further restrict or eliminate the income tax
exemption for interest on debt obligations in which the Fund may invest.
In order to reduce risk, Limited Term Tax Free Income Fund may invest in
exchange-traded options on interest rate futures contracts and indices. See
"Investment Techniques and Risk Factors -- About Option Transactions."
INVESTMENT TECHNIQUES AND RISK FACTORS
ABOUT OPTION TRANSACTIONS. Managed Income Fund and Limited Term Tax Free
Income Fund may purchase put and call options on financial (interest rate)
futures contracts traded on commodity exchanges, and interest rate indices
(if and when traded on options exchanges), solely as a hedge against adverse
changes resulting from market conditions in the values of securities held in
the Funds' portfolios or which they intend to purchase and where the
transactions are deemed appropriate to the reduction of risks inherent in the
applicable Fund's portfolio or contemplated investments. Each such Fund may
purchase put options as a hedge against declines in the market value of its
portfolio in declining markets, and call options as a hedge against increases
in the purchase prices of securities in rising markets.
Such Funds will not invest more than 5% of the value of their total
respective assets in purchased options, provided that options which are "in
the money" at the time of purchase may be excluded from such 5% investment
limitation. A call option is "in the money" if the exercise price is lower
than the current market price, and a put option is "in the money" if the
exercise price is higher than the current market price.
The Funds' loss exposure in purchasing an option is limited to the sum of the
premium paid (purchase price of the option) and the commission or other
transaction expenses associated with acquiring the option. The Funds' loss
exposure in writing a call option is limited to the cash difference between
the closing level of the index upon which the option is based on the day of
exercise and the exercise price of the option. Additional information with
respect to options is set forth in the Statements of Additional Information.
About Repurchase Agreements. A repurchase agreement involves the purchase by
a Fund of securities with the condition that after a stated period of time
(normally only one or two days) 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. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the applicable Fund
will seek to sell the collateral, which action could involve costs or delays.
In such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral (which may consist
of any fixed income security which is an eligible investment for the Fund
executing the repurchase agreement) will at all times be maintained in an
amount equal to the repurchase price under the agreement (including accrued
interest due thereunder), to the extent proceeds from the sale of collateral
were less than the repurchase price, the Fund would suffer a loss. In no
event may a Fund invest in repurchase agreements (other than, in the case of
Managed Income Fund, gestation repurchase agreements) maturing more than
seven days from the date of acquisition. The Adviser will monitor
creditworthiness of the firms with which the Funds enter into repurchase
agreements.
About Portfolio Transactions. Portfolio transactions in the over-the-counter
market will be effected with market makers or issuers, unless better overall
price and execution are available through a brokerage transaction. It is
anticipated that most of the portfolio transactions involving debt securities
will be executed on a principal basis. Also, with respect to the placement of
portfolio transactions with securities firms, subject to the overall policy
to seek to place portfolio transactions as efficiently as possible and at the
best price, research services and placement of orders by securities firms for
the Funds' shares may be taken into account as a factor in placing portfolio
transactions for the Funds. Additional information relating to portfolio
transactions and brokerage is set forth in the Statements of Additional
Information.
About Lending Of Portfolio Securities. In order to generate additional income,
each Fund may lend portfolio securities on a short-term or long-term basis, or
both, representing up to one-third of the value of its total assets to
broker/dealers, banks, or other institutional borrowers of securities. A Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Trustees. In these loan arrangements, the Fund will receive
collateral in the form of cash or United States Government securities equal to
at least 100% of the value of the securities loaned. 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. The Fund will pay a portion of
the income earned on the lending transaction to the placing broker and may pay
administrative and custodial fees in connection with these loans.
About When-Issued and Delayed Delivery Transactions. Each Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. In when-issued and delayed delivery transactions, a
Fund relies on the seller to complete the transaction. The seller's failure to
deliver the securities may cause a Fund to miss a price or yield considered to
be advantageous.
About Investing in Foreign Securities. Diversified Growth Fund, Equity Income
Fund and Managed Income Fund may invest in foreign securities. There may be
certain risks connected with investing in foreign securities. These include
risks of adverse political and economic developments (including possible
governmental seizure or nationalization of assets), the possible imposition of
exchange controls or other governmental restrictions, less uniformity in
accounting and reporting requirements, the possibility that there will be less
information on such securities and their issuers available to the public, the
difficulty of obtaining or enforcing court judgments abroad, restrictions on
foreign investments in other jurisdictions, difficulties in effecting the
repatriation of capital invested abroad, and difficulties in transaction
settlements and the effect of delay on shareholder equity. Foreign securities
may be subject to foreign taxes, which reduce yield, and may be less marketable
than comparable United States securities. Different risks may also exist for
Eurodollar Certificates of Deposit, Eurodollar Time Deposits and Yankee
Certificates of Deposit because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, recordkeeping and the public
availability of information. The value of a Fund's investments denominated in
foreign currencies will depend on the relative strengths of those currencies and
the United States dollar, and a Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the United States dollar. Changes in foreign currency exchange
rates also may affect the value of dividends and interest earned, gains and
losses realized on the sale of securities and net investment income and gains,
if any, to be distributed to shareholders by a Fund.
About Asset-Backed Securities. Managed Income Fund may invest in asset backed
securities, which include securities secured by company receivables, truck and
auto loans, leases, home equity loans and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional interests in the underlying pools of assets. Such
securities also may be debt instruments, which are known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. Managed Income Fund may invest in other asset-backed
securities that may be created in the future if the Adviser determines that they
are suitable.
Non-mortgage asset-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuer of such securities. These issues are traded on the over-the-counter
market and typically have a short-intermediate maturity structure depending on
the paydown characteristics of the underlying financial assets which are passed
through to the security holder. The purchase of non-mortgage asset-backed
securities raises risk considerations peculiar to the financing of the
instruments underlying such securities. For example, there is a risk of
prepayment by the issuer and due to the manner in which the issuing
organizations may perfect their interests in their respective obligations, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. Also, in most
states the security interest in a motor vehicle must be noted on the certificate
of title to perfect a security interest against competing claims of other
parties. Due to the large numbers of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the obligations underlying the
asset-backed, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the asset-backed securities.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on those securities. In
addition, various state and Federal laws give the motor vehicle owner the right
to assert against the holder of the owner's obligation certain defenses such
owner would have against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the related asset-backed securities. Insofar
as credit card receivables are concerned, credit card holders are entitled to
the protection of a number of state and Federal consumer credit laws, many of
which give such holders the right to set off certain amounts against balances
owned on the credit card, thereby reducing the amounts paid on such receivables.
In addition, unlike most other asset-backed securities, credit card receivables
are unsecured obligations of the card holder.
The development of non-mortgage asset-backed securities is at an early stage
compared to mortgage backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for non-mortgage
asset-backed securities is not as well developed as that for mortgage-backed
securities guaranteed by government agencies or instrumentalities. The Adviser
intends to limit its purchases of non-mortgage asset-backed securities to
securities that are readily marketable at the time of purchase.
About Fixed Income Securities. Managed Income Fund and Limited Term Tax Free
Income Fund are expected to invest in fixed income securities. Fixed income
securities are subject to market risk and, in the case of securities not issued
or guaranteed by the U.S. Government, to credit risk. Changes in market interest
rates or declines in an issuer's credit quality may cause the value of such
fixed income securities to decrease.
About Mortgage-Related Securities. Some of the United States Government
securities in which Managed Income Fund may invest will represent an undivided
interest in a pool of residential mortgages or may be collateralized by a pool
of residential mortgages ("mortgage-related securities"). Mortgage-related
securities have yield and maturity characteristics corresponding to the
underlying mortgages. Distributions to holders of mortgaged-related securities
include both interest and principal payments. Principal payments represent the
amortization of the principal of the underlying mortgages and any prepayments of
principal due to prepayment, refinancing, or foreclosure of the underlying
mortgages. Although maturities of the underlying mortgage loans may range up to
30 years, amortization and prepayments substantially shorten the effective
maturities of mortgage-related securities. Due to these features,
mortgage-related securities are less effective as a means of "locking in"
attractive long-term interest rates than fixed-income securities which pay only
a stated amount of interest until maturity, when the entire principal amount is
returned. This is caused by the need to reinvest at lower interest rates both
distributions of principal generally and significant prepayments which become
more likely as mortgage interest rates decline. Since comparatively high
interest rates cannot be effectively "locked in," mortgage-related securities
may have less potential for capital appreciation during periods of declining
interest rates than other non-callable fixed-income government securities of
comparable stated maturities. However, mortgage-related securities may
experience less pronounced declines in value during periods of rising interest
rates.
In addition, some of the CMOs purchased by Managed Income Fund may represent an
interest solely in the principal repayments or solely in the interest payments
on mortgage-related securities (stripped mortgage-backed securities or "SMBSs").
Due to the possibility of prepayments on the underlying mortgages, SMBSs may be
more interest-rate sensitive than other securities purchased by the Fund. If
prevailing interest rates fall below the level at which SMBSs were issued, there
may be substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only SMBSs and a reduction in the
amount of payments made to holders of interest-only SMBSs. It is possible that
the Fund might not recover its original investment on interest-only SMBSs if
there are substantial prepayments on the underlying mortgages. Therefore,
interest-only SMBSs generally increase in value as interest rates rise and
decrease in value as interest rates fall, counter to changes in value
experienced by most fixed income securities. The Fund's Adviser intends to use
this characteristic of interest-only SMBSs to reduce the effects of interest
rate changes on the value of the Fund's portfolio, while continuing to pursue
current income.
The credit characteristics of mortgage-related securities also differ in a
number of respects from those of traditional debt securities. The credit quality
of most mortgage-related securities depends primarily upon the credit quality of
the assets underlying such securities, how well the entity issuing the
securities is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit enhancement to
such securities.
Managed Income Fund may invest in participation interests ("Participation
Interests") in pools of original mortgage loans which have been submitted to a
U.S. Government agency or instrumentality (such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")) for pooling
and securitization. The Fund will invest in Participation Interests only through
repurchase agreements ("Gestation Repurchase Agreements"), and only if said
Participation Interests are deemed to be of comparable quality to securities
that possess a rating in the highest rating category in the case of a
single-rated security or that possess at least two ratings in the highest rating
category in the case of multiple rated securities, as determined in accordance
with procedures established by the Board of Trustees of the Fund.
In a Gestation Repurchase Agreement, original mortgage loans are presented by
the owner to a U.S. Government agency (GNMA, FNMA or FHLMC) for securitization.
The loans are delivered to a third party custodian who reviews them. If the
loans are deemed acceptable for securitization based on agency standards and the
custodian's own review procedures, the custodian, on behalf of the owner,
delivers Participation Interests in the loans. In the case of Managed Income
Fund, these Participation Interests are purchased by the Fund through repurchase
agreement transactions known as Gestation Repurchase Agreements. The Fund
purchases the Participation Interests subject to an obligation of the seller to
repurchase, and of the Fund to resell, the Participation Interest at a fixed
price (the "Repurchase Price") in 1 to 30 days after its purchase. The Fund or a
sub-custodian will have custody of Participation Interests acquired by the Fund
under a Gestation Repurchase Agreement.
Gestation Repurchase Agreements may provide a higher yield than conventional
repurchase agreements, and, in the case of longer maturities (30 days), may
provide Managed Income Fund with a greater yield advantage. Should the issuer of
the Participation Interests become bankrupt, the Fund would take delivery of the
underlying original mortgage loans. These loans will have already been sold in
the forward market prior to being assigned as collateral to the Participation
Interests. Therefore the Fund would hold them for 30 days or less prior to
making delivery to another institutional investor. The Fund might realize a loss
due to delays in such delivery or if the value of these loans did not equal or
exceed the Repurchase Price. The Fund may not invest more than 10% of the value
of its assets in Gestation Repurchase Agreements which are not terminable within
seven days.
Investment by Managed Income Fund in mortgage-related United States Government
securities, such as GNMA pass-through certificates, also involves certain risks.
The yield on a pass-through security is typically quoted based on the maturity
of the underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield. Accelerated prepayments adversely impact yields for pass-throughs
purchased at a premium; the opposite is true for pass-throughs purchased at a
discount. During periods of declining interest rates, prepayment of mortgages
underlying pass-through certificates can be expected to accelerate. When the
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding,
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
About Inverse Floating Rate Securities. An inverse floater may be considered to
be leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values. Accordingly, the duration of an inverse
floater may exceed its stated final maturity.
INVESTMENT LIMITATIONS
No Fund will:
* borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of the value of its
total assets and pledge up to 10% of its total assets to secure such
borrowings;
* lend any of its assets except portfolio securities up to one-third of its
total assets; or
* with respect to 75% of its total assets, invest more than 5% in securities of
any one issuer other than cash, cash items, or Government Securities, and
repurchase agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
No Fund will:
* invest more than 10% of its total assets in securities subject to restrictions
on resale under the Securities Act of 1933, except for commercial paper issued
under Section 4(2) of the Securities Act of 1933 and certain other restricted
securities which meet the criteria for liquidity as established by the
Trustees;
* invest more than 15% of its net assets in illiquid securities, including
repurchase agreements providing for settlement more than seven days after
notice, over-the-counter options in the case of Diversified Growth Fund and
Limited Term Tax Free Income Fund, and certain restricted securities not
determined by the Trustees to be liquid; or
* invest more than 10% of its total assets in securities of other investment
companies.
FIRST AMERICAN MUTUAL FUNDS INFORMATION
MANAGEMENT OF THE TRUST
Board of Trustees. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all of
the powers of the Trust except those reserved for the shareholders.
Investment Adviser. Investment decisions for the Funds are made by First Bank
National Association, the Funds' investment adviser (the "Adviser" or "FBNA"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
selection, purchase, and sale of portfolio instruments, for which it receives an
annual fee from each Fund.
Advisory Fees. The Adviser receives an annual investment advisory fee equal
to 0.70% of each Fund's average daily net assets. The investment advisory
fee is accrued and paid daily. Prior to March 31, 1994, Boulevard Bank
National Association served as adviser to each Fund, and received an annual
investment advisory fee equal to .70% of the Fund's average daily net
assets in the case of Managed Income Fund and Limited Term Tax Free Income
Fund and to .75% of average daily net assets in the case of Diversified
Growth Fund and Equity Income Fund. The Adviser has undertaken to reimburse
each Fund for operating expenses in excess of limitations established by
certain states. The Adviser may voluntarily choose to waive a portion of
its fee or reimburse other expenses of any Fund. The Adviser can terminate
such waiver or reimbursement policy at any time at its sole discretion.
Adviser's Background. FBNA, 601 Second Avenue South, Minneapolis, Minnesota
55480, has served as investment adviser to the funds that comprise the
First American Family of Funds since 1982. As of December 31, 1993, FBNA
was managing accounts with an aggregate value of over $6 billion.
Gerald C. Bren is a portfolio co-manager for the Diversified Growth Fund
and Equity Income Fund. Gerald has more than 20 years of investment
experience and has been FBNA's Manager of Equity Investments since 1986.
Gerald earned an MBA from the University of Chicago in 1972 and received
his Chartered Financial Analyst certification in 1977.
Albin S. Dubiak is a portfolio co-manager of the Diversified Growth Fund
and Equity Income Fund. Al began his investment career as a security
trader with The First National Bank of Chicago in 1963 before joining FBNA
as an investment analyst in 1969. Since 1988, he has been the Director of
Investment Research and Fund Management. Al earned his bachelor's degree
from Indiana University in 1962 and an MBA from the University of Arizona
in 1969.
Martin L. Jones is the portfolio manager for the Managed Income Fund.
Martin is currently the head portfolio manager for First American's Fixed
Income, Intermediate Government Bond, Intermediate Term Income, Limited
Term Income and Mortgage Securities Funds. Martin heads up FBNA's Fixed
Income group with over 20 years of investment experience. Formerly with
Harris Trust & Savings Bank, Dillon, Read & Co., and Loeb Rhoades & Co.,
Martin received his bachelor's degree from Texas Tech University, a
master's degree from the University of Texas, and an MBA from the
University of Chicago.
Richard W. Stanley is the portfolio manager for the Limited Term Tax Free
Income Fund. Dick is currently the portfolio manager for First American's
Intermediate Tax Free Fund, Minnesota Insured Intermediate Tax Free Fund,
and Colorado Intermediate Tax Free Fund. Dick entered the investment
business via investment sales with Smith Barney & Co. in 1958. He then
moved to Heritage Investment Advisors as head of fixed income investment
in 1973. He joined FBNA in early 1986 as Vice President and Manager of
Fixed Income Investment/Personal Trust. Dick oversees the management of
$800 million in common trust funds (seven common trust funds, of which
five are municipal funds). Dick earned an MBA from Cornell University in
1958 and received his Chartered Financial Analyst certification in 1977.
DISTRIBUTION OF FUND SHARES
SEI Financial Services Company ("SFS") is the principal distributor for
shares of the Funds. It is a Pennsylvania corporation organized on July 20,
1981, and is the principal distributor for a number of investment companies.
SFS is a wholly-owned subsidiary of SEI Corporation ("SEI").
The Adviser, the administrator and the distributor, in their discretion, may
use their own assets to pay for certain costs of distributing Fund shares.
Any such arrangement to pay such costs may be commenced or discontinued by
the Adviser, the administrator or the distributor at any time.
ADMINISTRATION OF THE FUNDS
Administrative Services. SEI Financial Management Corporation ("SFM"), which is
a wholly-owned subsidiary of SEI, provides the Trust with the administrative
personnel and services necessary to operate the Funds. Such services include
shareholder servicing and certain legal and accounting services. SFM provides
these services at an annual rate of .20% of each Fund's average daily net
assets.
The administrative fee received during any fiscal year shall aggregate at least
$50,000 with respect to each Fund. SFM may choose voluntarily to reimburse a
portion of its fee at any time.
Prior to May 1, 1994, Federated Administrative Services ("Federated") served as
administrator to the Trust. For the periods from the respective dates of public
investment noted under "Financial Highlights" to November 30, 1993, Federated
earned administrative fees of $47,123 with respect to Diversified Growth Fund,
of which $24,335 was voluntarily waived; $47,123 with respect to Equity Income
Fund, of which $26,186 was voluntarily waived; $84,957 with respect to Managed
Income Fund, of which $40,782 was voluntarily waived; and $38,493 with respect
to Limited Term Tax Free Income Fund, of which $37,233 was voluntarily waived.
For the period from December 1, 1993 to April 30, 1994, Federated earned
administrative fees of $20,685, $20,982, $43,965 and $20,685 from the respective
Funds.
Custodian. First Trust National Association (the "Custodian"), St. Paul,
Minnesota, is custodian for the securities and cash of the Funds. The Custodian
is a subsidiary of First Bank System, Inc., which also controls the Adviser.
Transfer Agent. Supervised Service Company, Kansas City, Missouri, is transfer
agent for the shares of the Funds and dividend disbursing agent for the Funds.
Legal Counsel. Legal counsel for the Funds is provided by Dorsey & Whitney,
Minneapolis, Minnesota.
Independent Accountants. The independent accountants for the Funds are KPMG Peat
Marwick, Minneapolis, Minnesota.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria, the
Adviser may give consideration to those firms which have sold or are selling
shares of the Funds and other funds distributed by SFS. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject
to review by the Trustees.
EXPENSES OF THE FUNDS
The Funds pay all of their own expenses and their allocable share of Trust
expenses. The expenses borne by the Funds include, but are not limited to,
the cost of: organizing the Trust and continuing its existence; Trustees'
fees; investment advisory and administrative services; printing prospectuses
and other Fund documents for shareholders; registering the Trust, the Funds,
and shares of the Funds with federal and state securities authorities; taxes
and commissions; issuing, purchasing, repurchasing, and redeeming shares;
fees for custodians, transfer agents, dividend disbursing agents, shareholder
servicing agents, and registrars; printing, mailing, auditing, accounting,
and legal expenses; reports to shareholders and governmental agencies;
meetings of Trustees and shareholders and proxy solicitations therefor;
insurance premiums; and such non-recurring and extraordinary items as may
arise. However, the Adviser may voluntarily assume some expenses and has, in
addition, undertaken to reimburse the Funds, up to the amount of the advisory
fee, the amount by which operating expenses exceed limitations imposed by
certain states.
NET ASSET VALUE
Each Fund's net asset value per share fluctuates. It is determined by
dividing the sum of the value of all securities and other assets of the Fund,
less liabilities of the Fund, by the number of Fund shares outstanding.
PURCHASES AND REDEMPTIONS OF SHARES
SHARE PURCHASES AND REDEMPTION
Shares are sold and redeemed on days on which the New York Stock Exchange is
open for business ("Business Days").
Payment for shares may be made by check or wire. Purchase orders will be
effective and eligible to receive dividends declared the same day if the
Transfer Agent receives an order before 3:00 p.m. (Central time), and the
Custodian receives Federal funds before the close of business that day.
Otherwise, the purchase order will be effective the next Business Day. The
Funds reserve the right to reject a purchase order when the Transfer Agent
determines that it is not in the best interest of the Fund and/or
Shareholder(s) to accept such purchase order.
The Funds are required to redeem for cash all full and fractional shares of
the Funds.
Redemption orders may be made any time before 3:00 p.m. (Central time) in
order to receive that day's redemption price. For redemption orders received
before 3:00 p.m. (Central time), payment ordinarily will be made the same day
by transfer of Federal funds, but payment may be made up to 7 days later.
WHAT SHARES COST
Institutional Class shares are sold and redeemed at their net asset value.
The net asset value is determined at 3:00 p.m. (Central time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,
the net asset value will not be calculated on Good Friday. The price per
share for purchases or redemptions is such value next computed after the
Transfer Agent receives the purchase order or redemption request. In the case
of redemptions and repurchases of shares owned by corporations, trusts or
estates, the distributor may require additional documents to evidence
appropriate authority in order to effect the redemption and the applicable
price will be that next determined following the receipt of the required
documentation.
EXCHANGE PRIVILEGE
Institutional Class shares of Funds may be exchanged for shares of other
funds in the First American family at net asset value. Exchanges of shares
must meet any applicable minimum investment of the fund for which shares are
being exchanged.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. An investor who is considering acquiring shares
in another fund in the First American family pursuant to the exchange
privilege should obtain a prospectus of the fund to be acquired and should
read such prospectus carefully.
The terms of any exchange privileges may be modified or terminated by the
Funds at any time. There are currently no additional fees or charges for the
exchange service and the Funds do not contemplate establishing such fees or
charges, although the Funds reserve the right to do so. Shareholders will be
notified of the modification or termination of the exchange privilege or the
imposition of any additional fees or changes.
Tax Consequences. An exercise of the exchange privilege is treated as a sale for
federal income tax purposes. Depending upon the circumstances, a short-term or
long-term capital gain or loss may be realized.
EXCHANGES BETWEEN CLASSES
Shares of a class in which an investor is no longer eligible for
participation may be exchanged for shares of a class in which that investor
is eligible to participate. An example of such an exchange would be a
situation in which Institutional Class shares of a Fund held by a financial
institution in a trust or agency capacity for one or more individual
beneficiaries are exchanged for Retail Class shares of such Fund and
distributed to the individual beneficiaries.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain
securities and cash for Fund shares. The Funds reserve the right to determine
the acceptability of securities to be exchanged. On the day securities are
accepted by a Fund, they are valued in the same manner as the Fund values its
assets. Investors wishing to exchange securities should first contact the
Transfer Agent.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, the Transfer Agent maintains a share account
for each shareholder of record. Share certificates are not issued by the
Funds.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report transactions and dividends
paid during the month.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly in the case of Diversified Growth
Fund and Equity Income Fund, and monthly in the case of Managed Income Fund
and Limited Term Income Fund. Capital gains realized by the Funds, if any,
will be distributed at least once every 12 months. Dividends and capital
gains will be automatically reinvested in additional shares of the applicable
Fund on payment dates at the ex-dividend date's net asset value without a
sales charge, unless cash payments are requested by writing to the Fund.
Dividends and capital gains can also be reinvested in shares of any other
fund in the Trust or in the First American Family. The amount of dividends
payable on Institutional Class shares may be more than the dividends payable
on Retail Class shares because of the distribution and service fees charged
to Retail Class shares.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Fund for vote. All shares of
each Fund have equal voting rights, except that in matters affecting only a
particular fund or class, only shareholders of that fund or class are
entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or a Fund's operation and for
the election of Trustees under certain circumstances. As of January 6, 1994,
First National Bank of Des Plaines (a subsidiary of Boulevard Bancorp, Inc.)
acting in various capacities for numerous accounts, was the owner of record
of 2,892,065 Class A shares (87.99%) of Diversified Growth Fund, 2,231,957
Class A Shares (77.32%) of Equity Income Fund, 4,979,783 Class A Shares
(67.52%) of Managed Income Fund, and 685,536 Class A Shares (36.37%) and
1,121,602 Class A shares (59.51%) of Limited Term Tax Free Income Fund, in
each case the only class then outstanding. It therefore may, for certain
purposes, be deemed to control the Funds, and be able to affect the outcome
of certain matters presented for a vote of shareholders.
Trustees may be removed by a two-thirds vote of a number of the Trustees or
by a two-thirds vote of a number of the shareholders at a special meeting. A
special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of all
shares of the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from its
assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any bank or non-bank affiliate thereof from sponsoring,
organizing, controlling, or distributing the shares of a registered, open-end
investment company continuously engaged in the issuance of its shares, and
prohibit banks generally from issuing, underwriting, selling, or distributing
securities in general. However, such banking laws and regulations do not
prohibit such a holding company or bank or non-bank affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of their customer. The Funds' Adviser, FBNA, is subject to such banking
laws and regulations.
FBNA believes, after consultation with counsel, that its performance of the
investment advisory services for the Funds, as contemplated by the advisory
agreement with the Trust, is not prohibited by the Glass-Steagall Act as it
has been interpreted by the courts and federal banking agencies or by other
banking laws and regulations applicable to national banks. Changes in either
federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent FBNA from continuing to perform all
or a part of the above services for its customers and/or the Fund. In such
event, changes in the operation of the Funds may occur, including the
possible alteration or termination of any automatic or other Fund share
investment and redemption services that are being provided by FBNA, and the
Trustees would consider alternative investment advisers and other means of
continuing available investment services. It is not expected that existing
Fund shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to FBNA is found) as a result of any of
these occurrences.
TAX INFORMATION
FEDERAL INCOME TAX
The Funds expect to pay no federal income tax because they intend to meet
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
other Funds, if any, will not be combined for tax purposes with those
realized by that Fund.
Unless otherwise exempt, shareholders of Diversified Growth Fund, Equity
Income Fund and Managed Income Fund are required to pay federal income tax on
any dividends and other distributions received. This applies whether
dividends and distributions are received in cash or as additional shares.
Shareholders of Limited Term Tax Free Income Fund are not required to pay the
federal regular income tax on any dividends received from the Fund that
represent net interest on tax-exempt municipal securities. However, under the
Tax Reform Act of 1986, dividends representing net interest earned on certain
"private activity" bonds issued after August 7, 1986, may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations. The Fund may purchase all types of
municipal bonds, including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items
not included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
Shareholders of Limited Term Tax Free Income Fund should consult with their
tax advisor to determine whether they are subject to the alternative minimum
tax or the corporate alternative minimum tax and, if so, the tax treatment of
dividends paid by the Fund.
Dividends of Limited Term Tax Free Income Fund representing net interest
income earned on some temporary investments and any realized net short-term
gains are taxed as ordinary income. Distributions representing net long-term
capital gains realized by the Fund, if any, will be taxable as long-term
capital gains regardless of the length of time shareholders have held their
shares.
These tax consequences regarding Limited Term Tax Free Income Fund apply
whether dividends are received in cash or as additional shares. Information
on the tax status of dividends and distributions is provided annually.
OTHER STATE AND LOCAL TAXES
Distributions by Limited Term Tax Free Income Fund representing net interest
received on tax-exempt municipal securities are not necessarily free from
income taxes of any state or local taxing authority. State laws differ on
this issue and shareholders are urged to consult their own tax adviser
regarding the status of their accounts under state and local tax laws.
Shareholders are urged to consult their own tax adviser regarding the status
of their accounts under federal, state, and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Funds advertise their total return and yield.
The total return of a Fund refers to the average compounded rate of return on
a hypothetical investment for designated time periods (including but not
limited to the period from which the Fund commenced operations through the
specified date), assuming that the entire investment is redeemed at the end
of each period and assuming the reinvestment of all dividend and capital gain
distributions. The total return on a Fund may also be quoted as a dollar
amount or on an aggregate basis.
The yield of a Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the
Fund over a thirty-day period by the maximum offering price per share of the
Fund on the last day of the period. This number is then annualized using
semi-annual compounding. The tax-equivalent yield of Limited Term Tax Free
Income Fund is calculated similarly to the yield, but is adjusted to reflect
the taxable yield that the Fund would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and tax-equivalent yield do
not necessarily reflect income actually earned by a Fund and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
From time to time, each Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
First American Mutual Funds
680 East Swedesford Road
Wayne, Pennsylvania 19087
Investment Adviser
FIRST BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55480
Custodian
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Administrator
SEI FINANCIAL MANAGEMENT
CORPORATION
680 East Swedesford Road
Wayne, Pennsylvania 19087
Transfer Agent
SUPERVISED SERVICE COMPANY
811 Main Street
Kansas City, Missouri 64105
Distributor
SEI FINANCIAL SERVICES COMPANY
680 East Swedesford Road
Wayne, Pennsylvania 19087
Independent Auditors
KPMG PEAT MARWICK
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY
220 South Sixth Street
Minneapolis, Minnesota 55402
FIRST AMERICAN
PROSPECTUS
INSTITUTIONAL CLASS
DIVERSIFIED GROWTH
EQUITY INCOME
MANAGED INCOME
LIMITED TERM TAX FREE INCOME
FIRST AMERICAN FUNDS
AUGUST 2, 1994
