FIRST AMERICAN MUTUAL FUNDS
MANAGED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of the Managed Income Fund (the "Fund") dated July 5, 1994. This Statement is
not a prospectus itself. To receive a copy of the prospectus, call or write
the Trust.
Statement dated July 5, 1994
FIRST BANK NATIONAL ASSOCIATION
INVESTMENT ADVISER
SEI FINANCIAL SERVICES COMPANY
DISTRIBUTOR
FAMF-1424 (5/94) RI
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND
1
INVESTMENT OBJECTIVE AND POLICIES 1
Options Transactions 3
First American Mutual FUNDS MANAGEMENT 8
INVESTMENT ADVISORY SERVICES 9
ADMINISTRATIVE SERVICES 10
Custodian; Transfer Agent; Counsel; Accountants 10
Portfolio Transactions and Allocation of Brokerage 11
PURCHASING SHARES 12
DETERMINING NET ASSET VALUE 13
EXCHANGE PRIVILEGE 14
REDEEMING SHARES 14
TAX STATUS 14
TOTAL RETURN 14
YIELD 15
PERFORMANCE COMPARISONS 15
Ratings of Obligations and Commercial Paper 16
Financial Statements 18
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GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in First American Mutual Funds (the "Trust"),
formerly named "The Boulevard Funds", which 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 and
classes of shares.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are set forth in the
Prospectus under "Investment Information." Certain additional investment
information is set forth below.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. The Fund's custodian will hold
the securities underlying any repurchase agreement or such securities will be
part of the Federal Reserve 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 of the repurchase agreement (including any accrued
interest), the 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
The Fund may purchase securities offered on a "when-issued" or "delayed
delivery" basis. When the Fund purchases securities on a when-issued basis,
it will maintain, in a segregated account with its custodian, cash, United
States Government securities or other liquid high-grade debt obligations
having an aggregate value equal to the amount of such purchase commitments
until payment is made therefor. During the current year, the Fund does not
anticipate investing more than 10% of its total assets in when-issued and
delayed delivery transactions.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-backed securities, including those
representing an undivided ownership interest in a pool of mortgage loans (for
example, GNMA, FNMA and FHLMC certificates.)
GNMA CERTIFICATES
Government National Mortgage Association ("GNMA") certificates ("GNMA
Certificates") are mortgage-backed securities which evidence an ownership
interest in a pool of mortgage loans. GNMA Certificates differ from bonds
in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates
that the Government Bond, Fixed Income, Intermediate Term Income, Limited
Term Income and Mortgage Securities Funds may purchase are the "modified
pass-through" type. "Modified pass-through" GNMA Certificates entitle the
holder to receive a share of all interest and principal payments paid and
owed on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment
of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United
States. GNMA is also empowered to borrow without limitation from the
United States Treasury if necessary to make any payments required under
its guarantee.
The average life of a GNMA Certificate is likely to be substantially less
than the original maturity of the mortgage pools underlying the
securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of
principal investment long before the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee.
As prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that
the average life of single-family dwelling mortgages with 25- to 30-year
maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. Therefore, it is customary to
treat GNMA Certificates as 30-year mortgage-backed securities which prepay
fully in the twelfth year.
The coupon rate of interest of GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages
underlying the GNMA Certificates by the amount of the fees paid to GNMA
and the issuer. The coupon rate by itself, however, does not indicate the
yield which will be earned on GNMA Certificates. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after
issuance, GNMA Certificates may trade in the secondary market at a premium
or discount. Second, interest is earned monthly, rather than semi-annually
as with traditional bonds; monthly compounding raises the effective yield
earned. Finally, the actual yield of a GNMA Certificate is influenced by
the prepayment experience of the mortgage pool underlying it. For example,
if the higher-yielding mortgages from the pool are prepaid, the yield on
the remaining pool will be reduced.
FNMA SECURITIES
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest on FNMA Certificates and the full return of principal.
Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully
in their twelfth year.
FHLMC SECURITIES
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970
through enactment of Title III of the Emergency Home Finance Act of 1970.
Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro
rata share of all interest and principal payments made and owed on the
underlying pool. FHLMC guarantees timely payment of interest on PCs and
the full return of principal. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a
year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years.
RESETS OF INTEREST
The interest rates paid on the Adjustable Rate Mortgage Securities
("ARMS") and Collateralized Mortgage Obligations ("CMOs") in which the
Fund invests generally are readjusted at intervals of one year or less to
an increment over some predetermined interest rate index. There are two
main categories of indices: those based on United States Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate (LIBOR),
the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate
is reset, and are subject to correspondingly increased price volatility.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS and CMOs in which
the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These
payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected
if market interest rates rise or fall faster and farther than the
allowable caps of floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying residential
mortgages are adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in which the
Fund invests to be shorter than the maturities stated in the underlying
mortgages.
CREDIT ENHANCEMENT
Certain of the Fund's investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the
credit quality and ratings of credit enhanced securities based upon the
financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally,
the Fund will not treat credit enhanced securities as having been issued
by the credit enhancer for diversification purposes. However, under
certain circumstances applicable regulations may require the Fund to treat
the securities as having been issued by both the issuer and the credit
enhancer. The bankruptcy, receivership or default of the credit enhancer
will adversely affect the quality and marketability of the underlying
security.
FLOATING RATE CORPORATE DEBT OBLIGATIONS
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at an
initial interest rate which is at or above prevailing market rates. Interest
rates are reset periodically (most commonly every 90 days) at different
levels on a predetermined scale. These levels of interest are ordinarily set
at progressively higher increments over time. Some increasing rate securities
may, by agreement, revert to a fixed rate status. These securities may also
contain features which allow the issuer the option to convert the increasing
rate of interest to a fixed rate under such terms, conditions, and
limitations as are described in each issue's prospectus.
There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it is
determined that the increasing rate securities have original issue discount,
a holder will be required to include as income in each taxable year, in
addition to interest paid on the security for that year, an amount equal to
the sum of the daily portions of original issue discount for each day during
the taxable year that such holder holds the security. There may also be tax
uncertainties with respect to whether an extension of maturity on an
increasing rate note will be treated as a taxable exchange. In the event it
is determined that an extension of maturity is a taxable exchange, a holder
will recognize a taxable gain or loss, which will be a short-term capital
gain or loss if he holds the security as a capital asset, to the extent that
the value of the security with an extended maturity differs from the adjusted
basis of the security deemed exchanged therefor.
FIXED RATE DEBT OBLIGATIONS
The Fund may invest in fixed rate corporate and government debt obligations.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive to
fluctuating interest rates. 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.
OPTIONS TRANSACTIONS
Options on interest rate futures contracts are options to buy or sell
contracts for future delivery of specified United States Government
securities. Options on interest rate indices are options which give the
holder the right to receive cash under certain circumstances. Upon exercise
of a put option, an amount of cash is received if the closing level of the
particular index upon which the option is based is less than the exercise
price of the option. In the case of exercise of a call option, a holder has a
right to receive an amount of cash if the closing level is greater than the
exercise price.
Investing in put options on futures contracts affords the Fund the
opportunity to profit from any decrease in the market value of the contract
(usually resulting from a general increase in interest rates) which is
greater than the aggregate of the exercise price to sell (put) the contract
and the premium and commission paid to purchase the option. Conversely,
investing in a call option on a futures contract affords the Fund an
opportunity to profit from any increase in the market value of the contract
(usually resulting from a general decrease in interest rates) over the
aggregate of the exercise price, premium and commission.
The use of options on interest rate futures contracts and interest rate
indices involves risk. The effective use of options strategies is dependent,
among other things, on the Adviser's ability to terminate options positions
at a time when they deem it desirable to do so. Although the Fund will enter
into an option position only if the Adviser believes that a liquid secondary
market exists for such option, there is no assurance that the Fund will be
able to effect closing transactions at any particular time or at an
acceptable price. In addition, the secondary market for an option may become
more restricted the longer the option is held by the Fund or is outstanding
generally.
The Fund's 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 Fund's 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. Because
index options are settled in cash, a call option writer cannot determine the
amount of its settlement obligation in advance. Index call options written
against the Fund's portfolio will be covered by owning securities, the
anticipated price changes of which, in the opinion of the Adviser, are
expected to be similar to those of the index. The Fund, in writing such
options, is likely to be required to maintain broker's margin in the form of
securities eligible for margin in a segregated account at the Company's
custodian. To the extent that the Adviser determines that the price level
risks of the Fund's portfolio do not substantially duplicate the risks of the
index involved, the Fund will maintain eligible securities in its custodial
account equal to its liability on a current basis.
When it writes a call option on an index, the Fund will assume the obligation
to pay the cash settlement amount upon receipt of notification that the
option has been exercised. Unless the Fund has cash on hand that is
sufficient to pay the cash settlement amount, it would be required to sell
securities it owned in order to satisfy the exercise notice. Because an
exercise must be settled within hours after receiving such notice, the Fund
could be forced to borrow money temporarily from a bank, pending receipt of
cash proceeds from selling portfolio securities. In general, the Fund will
not learn whether a call option has been exercised against it until the day
following the exercise date. When the Fund has written a call option, there
is also risk that the market may decline between the time the call option is
exercised (at a price that is fixed at the closing level of the index on the
day of exercise) and the time the Fund is able to raise sufficient cash to
satisfy the exercise notice.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS
The Fund may purchase put and call options on interest rate futures contracts
solely as a hedge against adverse market conditions (in other words, to
offset against a decline in prices of current portfolio holdings or an
increase in prices of securities intended to be purchased). An interest rate
futures contract creates an obligation on the part of the seller to deliver,
and an offsetting obligation on the part of the purchaser to accept delivery
of, the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A majority of transactions in
interest rate futures contracts, however, do not result in the actual
delivery of the underlying instrument, but are settled through liquidation
(by entering into an offsetting transaction). Currently, such futures
contracts are based on debt securities such as long-term United States
Treasury bonds and notes, GNMA modified pass-through mortgage-backed
securities, three-month United States Treasury bills and bank certificates of
deposit.
An interest rate futures contract provides for the future sale by one party
and the purchase by the other party of a certain amount of a specific
financial instrument (debt security) at a specified price, date, time and
place. An option on an interest rate futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser the right, in
return for the premium paid, to assume a position in an interest rate futures
contract at a specified exercise price at any time prior to the expiration
date of the option. Options on interest rate futures contracts are similar to
options on securities, which give the purchaser the right, in return for the
premium paid, to purchase securities. A call option gives the purchaser of
such option the right to buy, and obliges its writer to sell, a specified
underlying futures contract at a specified exercise price at any time prior
to the expiration date of the option. A purchaser of a put option has the
right to sell, and the writer has the obligation to buy, such contract at the
exercise price during the option period. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's future margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in
cash equal to the difference between the exercise price of the option and the
closing price of the interest rate futures contract on the expiration date.
The potential loss related to the purchase of an option on interest rate
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of the Fund.
The Fund will purchase put and call options on interest rate futures
contracts which are traded on a United States exchange or board of trade as a
hedge against changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing positions.
The Fund will purchase put options on interest rate futures contracts
securities if the Adviser anticipates a rise in interest rates. The purchase
of put options on interest rate futures contracts is analogous to the
purchase of put options on debt securities so as to hedge a portfolio of debt
securities against the risk of rising interest rates. Because of the inverse
relationship between the trends in interest rates and values of debt
securities, a rise in interest rates would result in a decline in the value
of debt securities held in the Fund's portfolio. Because the value of an
interest rate futures contract moves inversely in relation to changes in
interest rates, as is the case with debt securities, a put option on such a
contract becomes more valuable as interest rates rise. By purchasing put
options on interest rate futures contracts at a time when the Adviser expects
interest rates to rise, the Fund will seek to realize a profit to offset the
loss in value of its portfolio securities, without the need to sell such
securities.
The Fund will purchase call options on interest rate futures contracts if the
Adviser anticipates a decline in interest rates. The purchase of a call
option on an interest rate futures contract represents a means of obtaining
temporary exposure to market appreciation at limited risk. It is analogous to
the purchase of a call option on an individual debt security, which can be
used as a substitute for a position in the debt security itself. Depending
upon the pricing of the option compared to either the futures contract upon
which it is based or to the price of the underlying debt securities, it may
or may not be less risky than ownership of the futures contract or underlying
debt. The Fund will purchase a call option on an interest rate futures
contract to hedge against a market advance when the Fund is holding cash. The
Fund can take advantage of the anticipated rise in the value of long-term
securities without actually buying them until the market has stabilized. At
that time, the options can be liquidated and the Fund's cash can be used to
buy long-term securities.
There are several risks relating to investments in options on interest rate
futures contracts. The holder of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option of the
same series. There is no assurance that such closing transactions can be
effected by the Fund. The ability to establish and close out positions on
such options will be subject to the existence of a liquid secondary market.
In addition, the Fund's purchase of put or call options will be based upon
predictions as to anticipated interest rate trends by the Adviser, which
could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the
value of the options and of the Fund's portfolio securities.
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity
pool operators," which are defined as any person engaged in a business which
is of the nature of an investment trust, syndicate or a similar form of
enterprise, and who, in connection therewith, solicits, accepts or receives
from others funds, securities or property for the purpose of trading in any
commodity for future delivery on or subject to the rules of any contract
market. The CFTC has adopted Rule 4.5, which provides an exclusion from the
definition of commodity pool operator for any registered investment company
which (i) will use commodity futures or commodity options contracts solely
for bona fide hedging purposes (provided, however, that in the alternative,
with respect to each long position in a commodity future or commodity option
contact, an investment company may meet certain other tests set forth in Rule
4.5); (ii) will not enter into commodity futures and commodity options
contracts for which the aggregate initial margin and premiums exceed 5% of
its assets; (iii) will not be marketed to the public as a commodity pool or
as a vehicle for investing in commodity interests; (iv) will disclose to its
investors the purposes of and limitations on its commodity interest trading;
and (v) will submit to special calls of the CFTC for information. Any
investment company desiring to claim this exclusion must file a notice of
eligibility with both the CFTC and the National Futures Association. The
Trust has made such notice filings.
OPTIONS ON INTEREST RATE INDICES
Options on interest rate indices are similar to options on interest rate
futures contracts except that, rather than the right to take or make delivery
of a specific financial instrument at a specified price, an option on an
interest rate 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 indices may have different multipliers.
Trading in options on interest rate indices is expected to begin in the near
future. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
It is not certain that any market for such options will develop. As with
other types of options, the maximum amount at risk is the premium paid for
the options (plus transaction costs).
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Fund's investment adviser believes it is appropriate to do so in light of the
Fund's investment objective, without regard to the length of time a
particular security may have been held. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%. For the period from December 18, 1992
(date of initial public investment) to November 30, 1993, the Fund's
portfolio turnover rate was 39%.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of its total assets would be invested in any one industry.
However, the Fund may at times invest 25% or more of its total assets in
securities issued and/or guaranteed by the U.S. government, its agencies
or instrumentalities.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests in real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or interests
in real estate.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as are necessary for the
clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous, and then only in amounts not in excess of one-third of
the value of its total assets; provided that, while borrowings and reverse
repurchase agreements outstanding exceed 5% of the Fund's total assets,
any such borrowings will be repaid before additional investments are made.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or
10% of its total assets at the time of the pledge. For purposes of this
limitation, the purchase of securities on a when-issued basis is not
deemed to be a pledge.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of its total assets. This shall not prevent the Fund from
purchasing or holding corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer,
entering into repurchase agreements, or engaging in other transactions
which are permitted by the Fund's investment objective and policies or the
Trust's Declaration of Trust.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of its total assets, the Fund will not purchase the
securities of any issuer (other than cash, cash items, or securities
issued and/or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities) if, as a result, more than 5% of its total assets would be
invested in the securities of such issuer. (For the purpose of this
limitation, the Fund considers instruments issued by a U.S. branch of a
domestic bank having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items.")
Also, the Fund will not purchase more than 10% of any class of the
outstanding voting securities of any one issuer. For these purposes, the
Fund considers common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.
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.
INVESTING IN RESTRICTED SECURITIES
The Fund will not 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.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice and certain restricted securities not
determined by the Trustees to be liquid. To comply with certain state
restrictions, the Fund will limit these transactions to 10% of its net
assets. (If state restrictions change, this latter restriction may be
revised without shareholder approval or notification.)
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers that invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of its total assets in securities of
issuers, including their predecessors, that have been in operation for
less than three years. With respect to asset-backed securities, the Fund
will treat the originator of the asset pool as the company issuing the
security for purposes of determining compliance with this limitation.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING TO EXERCISE CONTROL
The Fund will not purchase securities of an issuer for the purpose of
exercising control or management.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
other investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets; nor are they applicable with
respect to securities of investment companies that have been exempted from
registration under the Investment Company Act of 1940. It should be noted
that investment companies incur certain expenses, such as management fees,
and, therefore, any investment by a fund in shares of another investment
company would be subject to such duplicate expenses.
The adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value of total or net assets will not result in
a violation of such restriction.
The Fund has no present intention to borrow money in excess of 5% of the
value of its net assets during the coming fiscal year.
FIRST AMERICAN MUTUAL FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with First Bank National
Association, SEI Financial Management Corporation, SEI Financial Services
Company, and the other Funds in the First American Family of Funds (First
American Investment Funds, Inc. ("FAIF") and First American Funds, Inc.
("FAF")).
<TABLE>
<CAPTION>
<S> <C>
NAME AND BUSINESS ADDRESS PRINCIPAL OCCUPATIONS
WELLES B. EASTMAN* TRUSTEE. DIRECTOR OF FAF SINCE JANUARY 1990 AND OF FAIF SINCE
998 SHADY LANE APRIL 1991; CHAIRMAN OF THE BOARD OF DIRECTORS OF ANNANDALE
WAYZATA, MINNESOTA 55391 STATE BANK, ANNANDALE, MINNESOTA; VICE PRESIDENT OF THE ADVISER
FROM 1968 AND VICE PRESIDENT OF THE INSTITUTIONAL TRUST GROUP OF
FIRST TRUST NATIONAL ASSOCIATION FROM 1986 UNTIL HIS RETIREMENT
IN DECEMBER 1988 FROM SUCH POSITIONS.
IRVING D. FISH TRUSTEE. DIRECTOR OF FAF SINCE 1984 AND OF FAIF SINCE APRIL
FALLON MCELLIGOTT, INC. 1991; PARTNER AND CHIEF FINANCIAL OFFICER OF FALLON MCELLIGOTT,
901 MARQUETTE, SUITE 3200 INC., A MINNEAPOLIS-BASED ADVERTISING AGENCY.
MINNEAPOLIS, MINNESOTA 55402
JOSEPH D. STRAUSS TRUSTEE. DIRECTOR OF FAF SINCE 1984 AND OF FAIF SINCE APRIL
7716 NORTH RIVERDALE ROAD 1991; CHAIRMAN OF FAF'S AND FAIF'S BOARDS SINCE 1992; PRESIDENT
BROOKLYN PARK, MINNESOTA 55444 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., SINCE 1992;
ATTORNEY-AT-LAW.
VIRGINIA L. STRINGER TRUSTEE. DIRECTOR OF FAF SINCE APRIL 1991 AND OF FAIF SINCE
712 LINWOOD AVENUE AUGUST 1987; MANAGEMENT CONSULTANT; FORMER PRESIDENT AND
ST. PAUL, MINNESOTA 55105 DIRECTOR OF THE INVENTURE GROUP, INC., A MANAGEMENT CONSULTING
AND TRAINING COMPANY, SINCE AUGUST 1991; PRESIDENT OF SCOTT'S
CONSULTING, INC., A MANAGEMENT CONSULTING COMPANY, FROM 1989 TO
1991; PRESIDENT OF SCOTT'S, INC., A TRANSPORTATION COMPANY, FROM
1989 TO 1990; VICE PRESIDENT OF HUMAN RESOURCES OF THE PILLSBURY
COMPANY, A FOOD MANUFACTURING COMPANY, FROM 1981 TO 1989.
GAE B. VEIT TRUSTEE. DIRECTOR OF FAIF AND FAF SINCE DECEMBER 7, 1993; OWNER
P.O. BOX 6 AND CEO OF SHINGOBEE BUILDERS, INC., A GENERAL CONTRACTOR.
LORETTO, MN 55357
CARMEN V. ROMEO TREASURER AND ASSISTANT SECRETARY OF THE TRUST BEGINNING APRIL
SEI CORPORATION 28, 1994 AND OF FAF AND FAIF BEGINNING NOVEMBER, 1992. DIRECTOR,
680 EAST SWEDESFORD ROAD EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
WAYNE, PENNSYLVANIA 19087 OF SEI, THE ADMINISTRATOR AND DISTRIBUTOR, SINCE 1981.
CARL A. GUARINO SENIOR VICE PRESIDENT OF THE TRUST BEGINNING APRIL 28, 1994 AND
SEI CORPORATION OF FAF AND FAIF BEGINNING NOVEMBER, 1992. SENIOR VICE PRESIDENT
680 EAST SWEDESFORD ROAD AND GENERAL COUNSEL OF SEI, THE ADMINISTRATOR AND DISTRIBUTOR
WAYNE, PENNSYLVANIA 19087 SINCE 1988. FROM 1986 TO 1988 MR. GUARINO WAS VICE PRESIDENT OF
DELAWARE MANAGEMENT COMPANY (INVESTMENT ADVISER).
KEVIN P. ROBINS VICE PRESIDENT AND ASSISTANT SECRETARY OF THE TRUST, FAIF AND
SEI CORPORATION FAF SINCE APRIL 28, 1994. VICE PRESIDENT, ASSISTANT SECRETARY
680 EAST SWEDESFORD ROAD AND GENERAL COUNSEL OF THE ADMINISTRATOR AND THE DISTRIBUTOR.
WAYNE, PENNSYLVANIA 19087
KATHRYN STANTON VICE PRESIDENT AND ASSISTANT SECRETARY OF THE TRUST, FAIF AND
SEI CORPORATION FAF SINCE APRIL 28, 1994. VICE PRESIDENT AND ASSISTANT SECRETARY
680 EAST SWEDESFORD ROAD OF THE ADMINISTRATOR AND THE DISTRIBUTOR.
WAYNE, PENNSYLVANIA 19087
SANDRA K. ORLOW VICE PRESIDENT AND ASSISTANT SECRETARY OF THE TRUST BEGINNING
SEI CORPORATION APRIL 28, 1994 AND OF FAF AND FAIF BEGINNING NOVEMBER, 1992.
680 EAST SWEDESFORD ROAD VICE PRESIDENT AND ASSISTANT SECRETARY OF SEI, THE ADMINISTRATOR
WAYNE, PENNSYLVANIA 19087 AND DISTRIBUTOR, SINCE 1983.
JEAN YOUNG CONTROLLER OF THE TRUST, FAF AND FAIF BEGINNING JUNE 8, 1994.
SEI CORPORATION DIRECTOR OF DOMESTIC FUNDS ACCOUNTING OF THE ADMINISTRATOR SINCE
680 EAST SWEDESFORD ROAD 1993. SENIOR AUDIT MANAGER, ERNST & YOUNG PRIOR TO 1993.
WAYNE, PENNSYLVANIA 19087
DAVID LEE SENIOR VICE PRESIDENT AND ASSISTANT SECRETARY OF FAF AND FAIF
SEI CORPORATION BEGINNING JUNE 1, 1993. PRESIDENT OF THE TRUST, FAIF AND FAF
680 EAST SWEDESFORD ROAD SINCE APRIL 28, 1994. SENIOR VICE PRESIDENT OF THE DISTRIBUTOR
WAYNE, PENNSYLVANIA 19087 SINCE 1993. VICE PRESIDENT OF THE DISTRIBUTOR SINCE 1991.
PRESIDENT, GW SIERRA TRUST FUNDS PRIOR TO 1991.
MICHAEL J. RADMER SECRETARY OF THE TRUST BEGINNING APRIL 28, 1994 AND OF FAF SINCE
220 SOUTH SIXTH STREET 1981 AND OF FAIF SINCE APRIL 1991; PARTNER OF DORSEY & WHITNEY,
MINNEAPOLIS, MINNESOTA 55402 A MINNEAPOLIS-BASED LAW FIRM AND GENERAL COUNSEL OF FAF AND
FAIF.
</TABLE>
*Denotes interested trustees (as that term is defined under the 1940 Act).
The First American Family of Funds (the "Funds") currently pay only to their
directors/trustees who are not paid employees of affiliates of the Funds a
fee of $8,400 per year plus $1,400 ($2,800 in the case of the Chairman) per
meeting of the Board attended and $400 per committee meeting attended and
reimburses travel expenses of directors/trustees and officers to attend Board
meetings. Legal fees and expenses are also paid to Dorsey & Whitney, the law
firm of which Michael J. Radmer is a partner.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As
of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: First National Bank of Des Plaines (a
subsidiary of Boulevard Bancorp, Inc.), Des Plaines, IL owned approximately
1,517,090 shares (20.57%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will only be
liable for their own willful defaults. If reasonable care has been exercised
in the selection of officers, agents, employees, or investment advisers, a
Trustee shall not be liable for any neglect or wrongdoing of any such person.
However, they are not protected against any liability to which they would
otherwise be subject by reason of their willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of
their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is First Bank National Association (the
"Adviser" or "FBNA"), a subsidiary of First Bank System, Inc.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the selection, purchase,
holding, or sale of any security, or for anything done or omitted by it,
except acts or omissions involving willful misfeasance, bad faith,
negligence, or reckless disregard of the duties imposed upon it by its
contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the period from November 17, 1992, (start of business) to November 30,
1993, the former Adviser earned advisory fees of $396,467, of which $198,233
was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2 1/2 % per year of the first $30 million of average net assets, 2% per
year of the next $70 million of average net assets, and 1 1/2 % per year
of the remaining average net assets, the Adviser will reimburse the Fund,
up to the full amount of its investment advisory fee, for the Fund's
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount to be reimbursed by the Adviser will be limited,
in any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
SEI Financial Management Corporation ("SFM"), a wholly-owned subsidiary of
SEI Corporation ("SEI"), provides administrative personnel and services to
the Fund for a fee set forth in the prospectus. For the period from November
17, 1992 (start of business) to November 30, 1993, Federated Administrative
Services, the former Administrator, earned administrative fees of $84,957, of
which $40,782 was voluntarily waived.
John A. Staley, IV, a former officer of the Fund, holds approximately 15% of
the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal year ended November 30,
1993, Federated Administrative Services paid approximately $164,324 for
services provided by Commercial Data Services, Inc.
CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
The custodian of the Fund's assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of FBS, which also controls the Adviser.
The Custodian takes no part in determining the investment policies of the
Fund or in deciding which securities are purchased or sold by the Fund. All
of the instruments representing the investments of the Fund 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 the Trust's officers or resolutions of the Board of Trustees.
The Custodian continues to serve so long as its appointment is approved at
least annually by the Board of Trustees including a majority of the Trustees
who are not interested persons (as defined under the 1940 Act) of the Trust.
Supervised Service Company, Kansas City, Missouri, is transfer agent for the
shares of the Fund and dividend disbursing agent for the Fund.
Dorsey & Whitney is independent General Counsel for the Funds.
KPMG Peat Marwick, 4200 Norwest Center, Minneapolis, Minnesota 55402, acts as
the Funds' independent auditors, providing audit services, including (1)
audits of the annual financial statements, (2) assistance and consultation in
connection with SEC filings, and (3) preparation or review of the annual
federal income tax returns filed on behalf of the Funds.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Decisions with respect to placement of the Fund's portfolio transactions are
made by the Adviser. The Fund's policy is to seek to place portfolio
transactions with brokers or dealers who will execute transactions as
efficiently as possible and at the most favorable price. The Adviser may,
however, select a broker or dealer to effect a particular transaction without
communicating with all brokers or dealers who might be able to effect such
transaction because of the volatility of the market and the desire of the
Adviser to accept a particular price for a security because the price offered
by the broker or dealer meets guidelines for profit, yield or both. Many of
the portfolio transactions involve payment of a brokerage commission by the
Fund. In some cases, transactions are with firms who act as principal of
their own accounts and not as brokers. In effecting transactions in
over-the-counter securities, the Fund deals with market makers unless it
appears that better price and execution are available elsewhere. Generally,
the Fund will effect transactions on a principal basis; that is, with the
issuer or major dealers acting for their own account 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.
While the Adviser does not deem it practicable and in the Fund's best
interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given by the Adviser to posted
commission rates as well as to other information concerning the level of
commissions charged on comparable transactions by other qualified brokers.
Subject to the policy of seeking favorable price and execution for the
transaction size and risk involved, in selecting brokers and dealers other
than the Distributor and determining commissions paid to them, the Adviser
may consider ability to provide supplemental performance, statistical and
other research information as well as computer hardware and software for
research purpose for consideration, analysis and evaluation by the staff of
the Adviser. In accordance with this policy, the Fund does 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 Fund may be taken into account as a
factor in the allocation of portfolio transactions.
Research services that may be received by the Adviser would include advice,
both directly and in writing, as to the value of securities, the advisability
of investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses and
reports concerning issues, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts. The research
services may allow the Adviser to supplement its own investment research
activities and enable the Adviser to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Fund. To the extent portfolio
transactions are effected with brokers and dealers who furnish research
services, the Adviser would receive a benefit, which is not capable of
evaluation in dollar amounts, without providing any direct monetary benefit
to the Fund from these transactions. Research services furnished by brokers
and dealers used by the Fund for portfolio transactions may be utilized by
the Adviser in connection with investment services for other accounts and,
likewise, research services provided by brokers and dealers used for
transactions of other accounts may be utilized by the Adviser in performing
services for the Fund. The Adviser determines the reasonableness of the
commissions paid in relation to its view of the value of the brokerage and
research services provided, considered in terms of the particular
transactions and its overall responsibilities with respect to all accounts as
to which it exercises investment discretion.
The Adviser has not entered into any formal or informal agreements with any
broker or dealer, and does not maintain any "formula" that must be followed
in connection with the placement of Fund portfolio transactions in exchange
for research services provided to the Adviser, except as noted below. The
Adviser may, from time to time, maintain an informal list of brokers and
dealers that will be used as a general guide in the placement of Fund
business in order to encourage certain brokers and dealers to provide the
Adviser with research services, which the Adviser anticipates will be useful
to it. Any list, if maintained, would be merely a general guide, which would
be used only after the primary criteria for the selection of brokers and
dealers (discussed above) had been met, and, accordingly, substantial
deviations from the list could occur. The Adviser would authorize the Fund to
pay an amount of commission for effecting a securities transaction in excess
of the amount of commission another broker or dealer would have charged only
if the Adviser determined in good faith that such amount of 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 Adviser with respect to
the Fund.
The Fund does not effect any brokerage transactions in its portfolio
securities with any broker or dealer affiliated directly or indirectly with
the Adviser or the Distributor unless such transactions, including the
frequency thereof, the receipt of commissions payable in connection
therewith, and the selection of the affiliated broker or dealer effecting
such transactions are not unfair or unreasonable to the shareholders of the
Fund, as determined by the Board of Trustees. Any transactions with an
affiliated broker or dealer must be on terms that are both at least as
favorable to the Fund as the Fund can obtain elsewhere and at least as
favorable as such affiliated broker or dealer normally gives to others.
When two or more clients of the Adviser are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the Adviser to be equitable to
each client. In some cases, this system could have a detrimental effect on
the price or volume of the security as far as each client is concerned. In
other cases, however, the ability of the clients to participate in volume
transactions will produce better executions for each client.
PURCHASING SHARES
Shares of the Fund are sold at their net asset value next determined after an
order is received, plus a sales charge as described in the prospectus, on
days the New York Stock Exchange and Federal Reserve Wire System are open for
business. The procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a distribution plan pursuant
to Rule 12b-1 which was promulgated by the SEC pursuant to the Investment
Company Act of 1940 (the "Plan"). The Plan provides for payment of fees to
the Distributor to finance any activity which is principally intended to
result in the sale of the Fund's shares subject to the Plan. Such activities
may include the advertising and marketing of shares of the Fund; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, the Distributor may pay fees to financial
institutions, fiduciaries, custodians for public funds, investment advisors,
and brokers for distribution and administrative services and to
administrators for administrative services provided to the Fund. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are
not limited to: communicating account openings; communicating account
closings; entering purchase transactions; entering redemption transactions;
providing or arranging to provide accounting support for all transactions;
wiring funds and receiving funds for purchases and redemptions of Fund
shares; confirming and reconciling all transactions; reviewing the activity
in Fund accounts and providing training and supervision of broker personnel;
posting and reinvesting dividends to Fund accounts or arranging for this
service to be performed by the Fund's transfer agent; and maintaining and
distributing current copies of prospectuses and shareholder reports to the
beneficial owners of Fund shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of
a sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund
will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
For the period from November 17, 1992 (start of business) to November 30,
1993, no costs were incurred pursuant to this agreement.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to: providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to
establish and maintain shareholders' accounts and records; processing
purchase and redemption transactions; processing automatic investments of
client account cash balances; answering routine client inquiries regarding
the Fund; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
may reasonably request.
For the period from November 17, 1992 (start of business) to November 30,
1993, no fees were paid to brokers and administrators.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to invest its assets in securities as fully as
possible so that maximum interest may be earned. To this end, all payments
from shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange securities they already own for Fund shares, or they
may exchange a combination of securities and cash for Fund shares. Any
securities to be exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale.
The Fund values such securities in the same manner as the Fund values its
assets. The basis of the exchange will depend upon the net asset value of
Fund shares on the day the securities are valued. One share of the Fund will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription,
conversion, or other rights attached to the securities become the property of
the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is currently treated as a sale for
federal income tax purposes. Depending upon the cost basis of the
securities exchanged for Fund shares, a gain or loss may be realized by
the investor.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING VALUE OF SECURITIES
Values of the Fund's portfolio securities are determined as follows:
*for bonds and other fixed income securities, as determined by an
independent pricing service;
*for short-term obligations, according to the mean between the bid and
asked prices, as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
*for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
*yield;
*quality;
*coupon rate;
*maturity;
*stability;
*risk;
*type of issue;
*trading characteristics;
*special circumstances of a security or trading market; and
*other market data.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at
the latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange
rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGING SHARES
Before the exchange, the shareholder must receive a prospectus of the fund of
the First American Family for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed, and the proceeds are invested in shares of the other fund of the
First American Family.
REDEEMING SHARES
Shares of the Fund are redeemed at the next computed net asset value after
the Transfer Agent receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price, in whole or in part,
by a distribution of securities from the Fund's portfolio. Redemption in kind
will be made in conformity with applicable rules of the SEC, taking such
securities at the same value employed in determining net asset value and
selecting the securities in a manner the Trustees determine to be fair and
equitable.
The Fund has elected to be governed by Rule 18f-1 pursuant to the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
TAX STATUS
THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet the
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. To qualify for this treatment, the Fund must,
among other requirements:
*derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
*derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
*invest in securities within certain statutory limits; and
*distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid
by the Fund is expected to be eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as
long-term capital gains regardless of how long they have held the shares.
TOTAL RETURN
The Fund's cumulative total return from December 18, 1992 to November 30,
1993 was 0.76%. Cumulative total return reflects the Fund's total performance
over a specific period of time. This total return assumes and is reduced by
the payment of the maximum sales load. The Fund's total return is
representative of only eleven months of Fund activity since the Fund's date
of initial public investment.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1993 was 3.66%.
The yield for the Fund is determined by dividing the net investment income
per share (as defined by the SEC) 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 value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders. To the extent that financial institutions and
broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
*portfolio quality;
*average portfolio maturity;
*type of instruments in which the portfolio is invested;
*changes in interest rates and market value of portfolio securities;
*changes in the Fund's expenses; and
*various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return. Investors may use financial publications and/or indices to obtain a
more complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of any
index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute net asset
value. The financial publications and/or indices which the Fund uses in
advertising may include:
*LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all income dividends and capital gains
distributions, if any, and takes into account any change in offering
price over a specific period of time. From time to time, the Fund will
quote its Lipper ranking in the "short-term investment-grade debt funds"
category in advertising and sales literature.
*MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns represent the change, over a specified period of time, in the value
of an investment in the Fund based on monthly reinvestment of dividends and
other distributions.
Advertisements may quote performance information that does not reflect the
effect of the sales load.
RATINGS OF OBLIGATIONS AND COMMERCIAL PAPER
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. When a security has been rated by
more than one service, 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.
RATINGS OF CORPORATE OBLIGATIONS AND MUNICIPAL BONDS
MOODY'S INVESTORS SERVICE, INC.
AAA: Securities which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA: Securities which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade securities. They are rated lower than the best
securities because margins of protection may not be as large as in Aaa
securities, or fluctuation of protective elements may be of greater
magnitude, or there may be other elements present which make the long-term
risks appear somewhat greater than in Aaa securities.
A: Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA: Securities which are rated Baa are considered as medium grade
obligations, being neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics, and in fact have some speculative
characteristics.
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.
STANDARD & POOR'S CORPORATION
AAA: Securities rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA: Securities rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only to a small
degree.
A: Securities rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Securities rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Although such securities normally
exhibit adequate protection standards, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for securities in this category than for
those in higher rated categories.
The ratings from AA to BBB may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories.
FITCH INVESTORS SERVICE, INC.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing
of earnings several times or many times interest requirements, with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judgd by
Fitch to be of safety virtually beyond question and are readily salable,
whose merits are not unlike those of the AAA class, but whose margin of
safety is less strikingly broad. The issue may be the obligation of a
small company, strongly secured but influenced as to rating by the lesser
financial power of the enterprise and more local type market. Bonds rated
A by Fitch are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and pay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions as to the ability of the
issuers to timely repay promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of
1933, and it does not represent that any specific instrument is a valid
obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
PRIME-1: Superior capacity for repayment
PRIME-2: Strong capacity for repayment
PRIME-3: Acceptable capacity for repayment
STANDARD & POOR'S CORPORATION
Commercial paper ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. Issues assigned
the A rating are regarded as having the greatest capacity for timely
payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment
is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) symbol designation.
FITCH INVESTORS SERVICE, INC.
The rating Fitch-1 (Highest Grade) is the highest commercial rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good
Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The Fund will only purchase commercial paper if 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).
BOULEVARD MANAGED INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS--88.9%
AEROSPACE--1.0%
$ 750,000 LOCKHEED CORP., 4.57%, 4/3/95 $ 746,798
AUTO/RENTAL--0.7%
500,000 HERTZ, CORP., 8.00%, 4/1/95 519,520
BANKING--10.9%
500,000 CITICORP, 8.84%, 6/17/94 512,180
1,000,000 CITICORP, 8.63%, 12/15/95 1,036,750
500,000 CITICORP, 8.625%, 11/15/94 518,875
600,000 CREDIT SUISSE, 9.50%, 7/1/94 617,880
1,000,000 FLEET/NORSTAR FINANCIAL GROUP, 10.20%, 9/15/95 1,087,810
1,700,000 GREAT WESTERN BANK OF BEVERLY HILLS, 9.80%, 2/15/94 1,717,833
500,000 MELLON BANK, N.A., 8.15%, 5/16/94 508,580
2,000,000 WELLS FARGO & CO., 7.63%, 10/1/94 2,055,020
TOTAL 8,054,928
BUSINESS CREDIT--6.2%
800,000 CIT GROUP HOLDINGS, INC., 8.625%, 1/1/94 802,988
500,000 INTERNATIONAL LEASE & FINANCE CORP., 5.50%, 6/20/94 504,445
700,000 INTERNATIONAL LEASE & FINANCE CORP., 6.50%, 4/1/94 704,760
500,000 INTERNATIONAL LEASE & FINANCE CORP., 7.00%, 11/7/94 511,025
485,000 U.S. WEST FINANCIAL SERVICES, INC., 8.55%, 12/1/93 485,000
500,000 XEROX CREDIT CORP., 9.50%, 11/1/94 519,590
1,000,000 XEROX CREDIT CORP., 5.375%, 7/15/95 1,005,650
TOTAL 4,533,458
CHEMICALS--1.7%
500,000 ICI WILMINGTON INC., 7.83%, 5/9/95 520,720
750,000 MONSANTO CO., 9.45%, 12/15/93 751,563
TOTAL 1,272,283
COMPUTERS--2.2%
1,000,000 COMDISCO, 6.50%, 6/15/94 1,009,970
608,000 INTEL OVERSEAS, CORP., 0.00%, 5/15/95 566,589
TOTAL 1,576,559
CONSTRUCTION--0.3%
200,000 CATERPILLAR INC., 9.375%, 12/1/93 200,000
DIVERSIFIED--1.8%
$500,000 TEXTRON, INC., 10.20%, 9/1/94 $ 517,665
750,000 TENNECO INC., 9.625%, 11/15/94 782,948
TOTAL 1,300,613
FINANCE--1.4%
1,000,000 HELLER FINANCIAL, INC., 6.50%, 11/15/95 1,026,920
FINANCE-LEASING--1.4%
1,000,000 GATX LEASING, CORP., 9.90%, 6/15/94 1,028,580
FINANCE-RECEIVABLES--1.4%
1,000,000 IBM CREDIT, CORP., 5.13%, 8/11/95 1,004,890
FOOD & BEVERAGE--2.5%
1,000,000 CONAGRA, INC., 9.19%, 6/30/95 1,064,300
750,000 WENDY'S INTERNATIONAL, INC., 12.125%, 4/1/95 816,083
TOTAL 1,880,383
GOVERNMENT-AGENCY--1.3%
1,000,000 FEDERAL HOME LOAN MORTGAGE, CORP., 4.75%, 1/15/2001 991,370
HEALTHCARE--0.7%
500,000 BAXTER INTERNATIONAL, 8.20%, 4/1/95 521,525
INSURANCE--3.0%
725,000 AON CORP., 7.50%, 2/1/94 728,850
1,425,000 PROVIDENT LIFE CAPITAL CORP., 9.65%, 12/1/94 1,492,160
TOTAL 2,221,010
OIL & GAS--4.7%
600,000 ASHLAND OIL CO., 9.27%, 4/15/94 609,570
500,000 ASHLAND OIL CO., 9.875%, 9/1/95 536,015
500,000 ATLANTIC RICHFIELD CO., 10.375%, 7/15/95 545,890
725,000 OCCIDENTAL PETROLEUM, CORP., 5.37%, 9/11/95 730,300
275,000 UNION OIL CO. OF CALIFORNIA, 9.75%, 3/1/94 278,303
780,000 UNION OIL CO. OF CALIFORNIA, 8.50%, 4/1/94 790,226
TOTAL 3,490,304
PAPER PRODUCTS--0.7%
450,000 INTERNATIONAL PAPER, CO., 9.625%, 10/15/95 486,747
PERSONAL CREDIT--14.7%
500,000 AMERICAN GENERAL FINANCE CORP., 7.30%, 10/16/95 523,285
200,000 AMERICAN GENERAL FINANCE CORP., 9.25%, 7/1/94 205,470
750,000 AMERICAN GENERAL FINANCE CORP., 9.50%, 12/15/94 786,870
600,000 BENEFICIAL CORP., 10.20%, 3/15/94 611,448
$1,000,000 BENEFICIAL CORP., 6.06%, 6/30/95 $ 1,020,540
500,000 COMMERCIAL CREDIT GROUP, INC., 6.95%, 10/1/94 510,225
PRINCIPAL
AMOUNT VALUE
350,000 COMMERCIAL CREDIT GROUP, INC., 8.45%, 2/1/94 352,216
1,000,000 DISCOVER CREDIT CORP., 6.30%, 5/9/94 1,006,560
500,000 DISCOVER CREDIT CORP., 6.68%, 5/15/95 511,225
1,000,000 GENERAL MOTORS ACCEPTANCE CORP., 9.45%, 5/15/94 1,023,350
1,000,000 GENERAL MOTORS ACCEPTANCE CORP., 8.00%, 4/1/94 1,010,820
500,000 HOUSEHOLD FINANCE CORP., 9.25%, 4/1/95 519,200
200,000 HOUSEHOLD FINANCE CORP., 8.75%, 3/15/94 202,388
300,000 ITT FINANCIAL CORP., 9.38%, 1/15/94 302,086
1,000,000 ITT FINANCIAL CORP., 7.125%, 10/1/94 1,020,800
500,000 NORDSTROM CREDIT, INC., 8.75%, 3/20/95 523,690
150,000 NORDSTROM CREDIT, INC., 8.65%, 12/7/93 150,115
500,000 PRIMERICA CORP., 8.60%, 3/15/94 505,818
TOTAL 10,786,106
PHOTOGRAPH EQUIPMENT--2.0%
750,000 EASTMAN KODAK CO., 10.05%, 3/15/94 761,558
700,000 EASTMAN KODAK CO., 9.2%, 1/15/95 736,575
TOTAL 1,498,133
RAILWAYS--0.8%
300,000 SOUTHERN RAILWAY CO., 8.00%, 3/15/94 303,828
250,000 UNION PACIFIC CORP., 9.16%, 9/25/95 267,708
TOTAL 571,536
RETAIL--4.8%
1,000,000 GREAT ATLANTIC & PACIFIC TEA, INC., 8.125%, 1/15/94 1,004,110
500,000 SEARS ROEBUCK & CO., 8.19%, 7/20/94 513,285
500,000 SEARS ROEBUCK & CO., 9.05%, 6/13/94 510,525
750,000 SUPER VALUE STORES, INC., 9.375%, 8/15/94 776,985
750,000 SUPER VALUE STORES, INC., 5.875%, 11/15/95 767,085
TOTAL 3,571,990
SECURITY BROKERS--9.8%
1,170,000 GOLDMAN SACHS & CO., 7.00%, 11/29/94 1,201,590
550,000 MERRILL LYNCH & CO., 8.77%, 2/15/94 554,945
1,000,000 PAINE WEBBER GROUP, INC., 9.90%, 6/29/94 1,030,670
1,000,000 SALOMON INC., 4.60%, 1/15/95 996,130
600,000 SALOMON INC., 9.07%, 3/15/94 606,984
200,000 SALOMON INC., 8.40%, 5/15/94 202,778
1,000,000 SALOMON INC., 4.80%, 5/15/95 993,560
$1,000,000 SHEARSON LEHMAN BROTHERS, INC., 6.00%, 12,30,94 $ 1,012,390
615,000 SHEARSON LEHMAN HUTTON, INC., 12.50%, 10/15/94 654,747
TOTAL 7,253,794
TOBACCO--2.9%
400,000 AMERICAN BRANDS, INC., 7.84%, 5/24/94 405,980
250,000 PHILIP MORRIS COS., INC., 7.625%, 2/15/94 251,760
500,000 PHILIP MORRIS COS., INC., 8.60%, 12/8/93 500,425
1,000,000 PHILIP MORRIS COS., INC., 6.25%, 6/5/95 1,019,710
TOTAL 2,177,875
UTILITIES--12.0%
1,000,000 HOUSTON LIGHT & POWER CO., 8.625%, 1/15/96 1,058,740
1,150,000 JERSEY CENTRAL POWER & LIGHT CO., 4.625%, 3/1/95 1,189,330
1,000,000 MISSISSIPPI POWER & LIGHT CO., 4.625%, 3/1/95 995,240
1,000,000 NEW YORK STATE ELECTRIC & GAS CORP., 8.375%, 8/15/94 1,027,870
1,050,000 NIAGARA MOHAWK POWER CORP., 8.88%, 8/1/94 1,079,672
700,000 PACIFICORP, 8.41%, 2/1/95 727,460
725,000 PACIFIC GAS & ELECTRIC CO., 4.50%, 6/1/594 716,074
500,000 SOUTHERN NATURAL GAS CO., 9.625%, 6/15/94 513,505
500,000 UNITED ILLUMINATING CO., 7.63%, 9/12/94 508,510
1,000,000 WASHINGTON GAS & LIGHTING CO., 7.01%, 9/26/94 1,019,250
TOTAL 8,835,651
TOTAL CORPORATE BONDS (IDENTIFIED COST $66,941,858) 65,550,973
FLOATING RATE NOTES--6.8%
AEROSPACE--1.4%
1,000,000 LOCKHEED CORP., 3.95%, 5/11/95 999,200
BANKING--1.4%
1,000,000 CHEMICAL BANKING CORP., 3.78%, 2/15/95 999,700
GOVERNMENT AGENCY--2.7%
1,000,000 FEDERAL NATIONAL MORTGAGE ASSOCIATION, 3.40%, 4/16/95 1,000,710
1,000,000 FEDERAL HOME LOAN BANK, REMIC, 4.00%, 8/24/98 999,380
TOTAL 2,000,090
SECURITY BROKERS--1.3%
1,000,000 SHEARSON LEHMAN BROTHERS, INC., 4.13%, 5/17/96 998,440
TOTAL FLOATING RATE NOTES (IDENTIFIED COST $4,999,180) 4,997,430
*REPURCHASE AGREEMENT--3.4%
$2,516,568 MORGAN STANLEY & CO. REPO., 3.18%, DATED 11/30/93, DUE $ 2,516,568
12/01/93
(AT AMORTIZED COST) (NOTE 2A)
TOTAL INVESTMENTS (IDENTIFIED COST $74,457,606) $73,064,971+
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations, based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $74,457,606.
The net unrealized depreciation of investments on a federal income tax basis
amounts to $1,392,635 which is comprised of $1,530 appreciation and
$1,394,165 depreciation at November 30, 1993.
The following abbreviation is used in this portfolio: REMIC--Real Estate
Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($73,748,278) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
BOULEVARD MANAGED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
INVESTMENTS IN SECURITIES, AT VALUE (NOTES 2A AND 2B) $ 73,064,971
(IDENTIFIED AND TAX COST; $74,457,606)
CASH 81,900
INTEREST AND DIVIDEND RECEIVABLE 1,311,295
RECEIVABLE FOR FUND SHARES SOLD 10,263
DEFERRED EXPENSES (NOTE 2F) 31,844
TOTAL ASSETS 74,500,273
LIABILITIES:
PAYABLE FOR INVESTMENTS PURCHASED $528,556
PAYABLE FOR FUND SHARES REDEEMED 110,766
ACCRUAL EXPENSES AND OTHER LIABILITIES 112,673
TOTAL LIABILITIES 751,995
NET ASSETS for 7,542,897 shares of beneficial interest $ 73,748,278
outstanding
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 75,536,642
NET UNREALIZED DEPRECIATION OF INVESTMENTS (1,392,635)
ACCUMULATED NET REALIZED LOSS ON INVESTMENTS (446,246)
UNDISTRIBUTED NET INVESTMENT INCOME 50,517
TOTAL $ 73,748,278
NET ASSET VALUE, and Redemption Price Per Share $ 9.78
($73,748,278 / 7,542,897 shares of beneficial interest
outstanding)
Computation of Offering Price*:
Offering Price Per Share (100/97 of $9.78) $ 10.08
</TABLE>
* No sales charges were imposed on purchases of shares prior to November 30,
1993 by deposit or credit customers of Boulevard Bank or its affiliates or
spouses and children under 21 of such customers. See "What Shares Cost" in
the Prospectus.
(See Notes which are an integral part of the Financial Statements)
BOULEVARD MANAGED INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993*
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
INTEREST INCOME (NOTE 2C) $ 4,154,291
EXPENSES
INVESTMENT ADVISORY FEE (NOTE 5) $396,467
ADMINISTRATIVE PERSONNEL AND SERVICES FEE (NOTE 5) 84,957
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND 20,367
EXPENSE (NOTE 5)
CUSTODIAN EXPENSES (NOTE 5) 18,262
RECORDKEEPER FEES (NOTE 5) 57,058
LEGAL FEES 3,271
PRINTING AND POSTAGE 10,212
INSURANCE PREMIUMS 6,645
MISCELLANEOUS 7,365
TOTAL EXPENSES 604,604
DEDUCT
WAIVER OF INVESTMENT ADVISORY FEE (NOTE 5) $198,233
WAIVER OF ADMINISTRATIVE PERSONNEL AND SERVICE 40,782 239,015
FEES
(NOTE 5)
NET EXPENSES 365,589
NET INVESTMENT INCOME $ 3,788,702
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
NET REALIZED LOSS ON INVESTMENTS (IDENTIFIED COST (446,246)
BASIS)
NET CHANGE IN UNREALIZED DEPRECIATION ON (1,392,635)
INVESTMENTS
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (1,838,881)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,949,821
</TABLE>
* For the period from November 17, 1992 (start of business) to November 30,
1993.
(See Notes which are an integral part of the Financial Statements)
BOULEVARD MANAGED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS
NET INVESTMENT INCOME $ 3,788,702
NET REALIZED LOSS ON INVESTMENTS ($446,246 NET LOSS AS COMPUTED (446,246)
FOR
FEDERAL TAX PURPOSES) (NOTE 2D)
CHANGE IN NET UNREALIZED DEPRECIATION OF INVESTMENTS (1,392,635)
CHANGE IN NET ASSETS FROM OPERATIONS 1,949,821
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (3,738,185)
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
PROCEEDS FROM SALE OF SHARES 87,518,079
NET ASSET VALUE OF SHARES ISSUED TO SHAREHOLDERS ELECTING TO 2,847,794
RECEIVE
PAYMENT OF DIVIDENDS IN FUND SHARES
COST OF SHARES REDEEMED (14,929,231)
CHANGE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 75,436,642
CHANGE IN NET ASSETS 73,648,278
NET ASSETS
BEGINNING OF PERIOD 100,000
END OF PERIOD (INCLUDING UNDISTRIBUTED
NET INVESTMENT INCOME OF $50,517) $ 73,748,278
</TABLE>
* For the period from November 17, 1992 (start of business) to November 30,
1993.
(See Notes which are an integral part of the Financial Statements)
BOULEVARD MANAGED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
(1)ORGANIZATION
The Boulevard Funds (the "Trust") are registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of the Boulevard
Managed Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio of the
Boulevard Funds are segregated and a shareholder's interest is limited to the
portfolio in which shares are held.
(2)SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investment Valuations--Corporate bonds (and other fixed income
securities/asset backed securities) are valued on the last sale price on
a national securities exchange, if available. Otherwise, they are valued
at the mean between the bid and asked prices provided by independent
pricing services. Short-term obligations are valued at the mean between
bid and asked prices as furnished by an independent pricing service.
However, short-term obligations with maturities of sixty days or less at
the time of purchase are valued at amortized cost, which approximates
value.
B. Repurchase Agreements--It is the policy of the Fund to require the
custodian bank to take possession of, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value
of each repurchase agreement's underlying securities to ensure the
existence of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.
C. Income--Interest income is recorded on the accrual basis. Interest
income includes interest and discount earned (net of premium) on
short-term obligations, and interest earned on all other debt securities
including original issue discount as required by the Internal Revenue
Code.
D. Federal Taxes--It is the Fund's policy to comply with the provisions of
the Internal Revenue Code applicable to investment companies and to
distribute to shareholders each year all of its taxable income,
including any net realized gain on investments. Accordingly, no
provision for federal tax is necessary.
At November 30, 1993, the Fund, for federal tax purposes, had a capital
loss carryforward of $446,246 which will reduce the Fund's taxable
income arising from future net realized gain on investments, if any, to
the extent permitted by the Internal Revenue Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax. Pursuant
to the Code, such capital loss carryforward will expire in 2001.
E. When-Issued and Delayed Delivery Transactions--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and
policies and not for the purpose of investment leverage. The Fund will
record a when-issued security and the related liability on the trade
date. Until the securities are received and paid for, the Fund will
maintain security positions such that sufficient liquid assets will be
available to make payment for the securities purchased. Securities
purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. Deferred Expenses--The costs incurred by the Fund with respect to its
initial registration, excluding the initial expense of registering the
shares, have been deferred and are being amortized using the
straight-line method over a period of five years from the Fund's
commencement date.
G. Other--Investment transactions are accounted for on the date of the
transaction.
(3)DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
reinvested in additional shares of the Fund on the payment date at the
ex-dividend date net asset value without a sales charge, unless cash payments
are requested. Distributions of any net realized capital gains will be made
at least once every twelve months. Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
(4)SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended
Noember 30, 1993*
<S> <C>
Shares outstanding, beginning of period 10,000
Shares sold 8,749,204
Shares issued to shareholders electing to receive 287,777
payment of
dividends in Fund shares
Shares redeemed (1,504,084)
Shares outstanding, end of period 7,542,897
</TABLE>
* For the period from November 17, 1992 (start of business) to November 30,
1993.
(5)INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Boulevard Bank National Association, the Fund's investment adviser (the
"Adviser" or "Boulevard Bank"), receives for its services an annual
investment advisory fee equal to 0.70 of 1% of the Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse other expenses of the Fund. The Adviser can terminate such waiver
or reimbursement policy at any time at its sole discretion. For the period
ended November 30, 1993, the Adviser earned an investment advisory fee of
$396,467, of which $198,233 was voluntarily waived.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives for its services an
annual fee equal to .150 of 1% on the first $250 million of average aggregate
daily net assets of the Trust; .125 of 1% on the next $250 million; .100 of
1% on the next $250 million; and .075 of 1% on average aggregate daily net
assets in excess of $750 million. For the period ended November 30, 1993, FAS
earned $84,957, of which $40,782 was voluntarily waived. The administrative
fee received during any fiscal year shall aggregate at least $50,000 with
respect to the Fund. FAS may choose voluntarily to reimburse a portion of its
fee at any time.
State Street Bank and Trust Company is the custodian for the securities and
cash of the Fund. For the period ended November 30, 1993, the custodian
earned $18,262.
Federated Services Company is the transfer and dividend disbursing agent for
the Fund. It also provides certain accounting and recordkeeping services. For
the period ended November 30, 1993, Federated Services Company earned
$20,367, for transfer and dividend disbursing agent fees and expenses, and
$57,058, for recordkeeping fees.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of
the Fund, for fees it paid which relate to the distribution and
administration of the Fund. The Plan provides that the Fund will incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Fund annually to pay commissions, maintenance fees and to compensate FSC. The
Fund will not accrue or pay any distribution expenses pursuant to the Plan
until a separate class of shares has been created for certain institutional
investors.
Certain of the Officers and Trustees of the Fund are Officers and Directors
of the above Corporations.
Organization expenses of $48,249 were borne initially by FAS. The Fund has
agreed to reimburse the Administrator for the organizational expenses
initially borne by the Administrator during the five year period following
the date the Trust's Portfolio became effective. For the period ended
November 30, 1993, $4,000 of costs were incurred pursuant to this agreement.
As of November 30, 1993, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: First National Bank of Des Plaines (a
subsidiary of Boulevard Bancorp, Inc.) Des Plaines, IL owned approximately
6,544,261 shares (86.76%).
(6)INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
period ended November 30, 1993, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $93,086,367
Sales $20,711,859
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Boulevard Managed Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights
(included on page 2) present fairly, in all material respects, the financial
position of Boulevard Managed Income Fund, (one of the portfolios of The
Boulevard Funds, hereafter referred to as the "Fund") at November 30, 1993,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities at November 30, 1993, by
correspondence with the custodian and brokers, provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE
Chicago, Illinois
January 20, 1994
