0000897101-01-500679.txt : 20011030 0000897101-01-500679.hdr.sgml : 20011030 ACCESSION NUMBER: 0000897101-01-500679 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20011026 EFFECTIVENESS DATE: 20011101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT LARGE CAP GROWTH FUND INC CENTRAL INDEX KEY: 0000356786 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411414580 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-75152 FILM NUMBER: 1767215 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CENTER 90 S SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CENTER 90 SOUTH ST STREET 2: 4600 NORWEST CENTER 90 SOUTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING GROWTH FUND INC/NEW DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19940620 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT LARGE CAP GROWTH FUND INC CENTRAL INDEX KEY: 0000356786 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411414580 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03343 FILM NUMBER: 1767216 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CENTER 90 S SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CENTER 90 SOUTH ST STREET 2: 4600 NORWEST CENTER 90 SOUTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING GROWTH FUND INC/NEW DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19940620 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MUTUAL FUNDS INC CENTRAL INDEX KEY: 0000877880 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-42101 FILM NUMBER: 1767217 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CENTER STREET 2: 90 S SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST STREET 2: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING MUTUAL FUNDS INC DATE OF NAME CHANGE: 19920929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MUTUAL FUNDS INC CENTRAL INDEX KEY: 0000877880 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06373 FILM NUMBER: 1767218 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CENTER STREET 2: 90 S SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST STREET 2: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING MUTUAL FUNDS INC DATE OF NAME CHANGE: 19920929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MID CAP GROWTH FUND INC CENTRAL INDEX KEY: 0000356787 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411414580 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-75151 FILM NUMBER: 1767219 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 17TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CTR, 90 S 17TH ST STREET 2: 4600 NORWEST CTR, 90 S 17TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING INCOME & GROWTH FUND INC DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT GROWTH FUND INC DATE OF NAME CHANGE: 19940620 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19930923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MID CAP GROWTH FUND INC CENTRAL INDEX KEY: 0000356787 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411414580 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03342 FILM NUMBER: 1767220 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 17TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-32 MAIL ADDRESS: STREET 1: 4600 NORWEST CTR, 90 S 17TH ST STREET 2: 4600 NORWEST CTR, 90 S 17TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING INCOME & GROWTH FUND INC DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT GROWTH FUND INC DATE OF NAME CHANGE: 19940620 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19930923 485BPOS 1 sit014229_485bpos.txt SIT MUTUAL FUNDS, INC. FORM 485BPOS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X_ (File No. 2-75151) Post-Effective Amendment No. _25_ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _X_ (File No. 811-03342) Post-Effective Amendment No. _28_ SIT MID CAP GROWTH FUND, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 4600 Wells Fargo Center, Minneapolis, Minnesota 55402 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (612) 332-3223 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Kelly K. Boston, Esq. Sit Mutual Funds 4600 Wells Fargo Center Minneapolis, Minnesota 55402 (NAME AND ADDRESS OF AGENT FOR SERVICE) COPY TO: Michael J. Radmer, Esq. Dorsey & Whitney 220 Pillsbury Center South Minneapolis, Minnesota 55402 ____ immediately upon filing pursuant to paragraph (b) of rule 485 _XX_ on November 1, 2001 pursuant to paragraph (b) of rule 485 ____ 60 days after filing pursuant to paragraph (a)(1) of rule 485 ____ on (specify date) pursuant to paragraph (a)(1) of rule 485 ____ 75 days after filing pursuant to paragraph (a)(2) of rule 485 ____ on (specify date) pursuant to paragraph (a)(2) of rule 485 The Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year was filed with the Securities and Exchange Commission on or about July 25, 2001. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X_ (File No. 2-75152) Post-Effective Amendment No. _25_ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _X_ (File No. 811-03343) Post-Effective Amendment No. _28_ SIT LARGE CAP GROWTH FUND, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 4600 Wells Fargo Center, Minneapolis, Minnesota 55402 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (612) 332-3223 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Kelly K. Boston, Esq. Sit Mutual Funds 4600 Wells Fargo Center Minneapolis, Minnesota 55402 (NAME AND ADDRESS OF AGENT FOR SERVICE) COPY TO: Michael J. Radmer, Esq. Dorsey & Whitney 220 Pillsbury Center South Minneapolis, Minnesota 55402 ____ immediately upon filing pursuant to paragraph (b) of rule 485 _XX_ on November 1, 2001 pursuant to paragraph (b) of rule 485 ____ 60 days after filing pursuant to paragraph (a)(1) of rule 485 ____ on (specify date) pursuant to paragraph (a)(1) of rule 485 ____ 75 days after filing pursuant to paragraph (a)(2) of rule 485 ____ on (specify date) pursuant to paragraph (a)(2) of rule 485 The Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year was filed with the Securities and Exchange Commission on or about July 25, 2001. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X_ (File No. 33-42101) Post-Effective Amendment No. _19_ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _X_ (File No. 811-06373) Post-Effective Amendment No. _20_ SIT MUTUAL FUNDS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 4600 Wells Fargo Center, Minneapolis, Minnesota 55402 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (612) 332-3223 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Kelly K. Boston, Esq. Sit Mutual Funds 4600 Wells Fargo Center Minneapolis, Minnesota 55402 (NAME AND ADDRESS OF AGENT FOR SERVICE) COPY TO: Michael J. Radmer, Esq. Dorsey & Whitney 220 Pillsbury Center South Minneapolis, Minnesota 55402 ____ immediately upon filing pursuant to paragraph (b) of rule 485 _XX_ on November 1, 2001 pursuant to paragraph (b) of rule 485 ____ 60 days after filing pursuant to paragraph (a)(1) of rule 485 ____ on (specify date) pursuant to paragraph (a)(1) of rule 485 ____ 75 days after filing pursuant to paragraph (a)(2) of rule 485 ____ on (specify date) pursuant to paragraph (a)(2) of rule 485 The Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year was filed with the Securities and Exchange Commission on or about July 25, 2001. STOCK FUNDS PROSPECTUS NOVEMBER 1, 2001 BALANCED FUND LARGE CAP GROWTH FUND MID CAP GROWTH FUND INTERNATIONAL GROWTH FUND SMALL CAP GROWTH FUND SCIENCE AND TECHNOLOGY GROWTH FUND DEVELOPING MARKETS GROWTH FUND [LOGO] SIT MUTUAL FUNDS ---------------- A FAMILY OF 100% NO-LOAD FUNDS SIT FAMILY OF FUNDS [CHART] STABILITY: INCOME: GROWTH: HIGH GROWTH: SAFETY OF PRINCIPAL INCREASED INCOME LONG-TERM CAPITAL LONG-TERM CAPITAL AND CURRENT INCOME APPRECIATION APPRECIATION AND INCOME MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH TAX-FREE INCOME SMALL CAP GROWTH MINNESOTA TAX-FREE SCIENCE AND INCOME TECHNOLOGY GROWTH BOND DEVELOPING MARKETS GROWTH [ ] PRINCIPAL STABILITY & CURRENT INCOME [ ] GROWTH POTENTIAL [LOGO] SIT MUTUAL FUNDS ---------------- (Not part of Prospectus) SIT MUTUAL FUNDS STOCK FUNDS PROSPECTUS NOVEMBER 1, 2001 BALANCED FUND LARGE CAP GROWTH FUND MID CAP GROWTH FUND INTERNATIONAL GROWTH FUND SMALL CAP GROWTH FUND SCIENCE AND TECHNOLOGY GROWTH FUND DEVELOPING MARKETS GROWTH FUND THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS INTRODUCTION 1 FUND SUMMARIES Investment Objectives and Principal Investment Strategies BALANCED FUND 2 LARGE CAP GROWTH FUND 5 MID CAP GROWTH FUND 6 INTERNATIONAL GROWTH FUND 7 SMALL CAP GROWTH FUND 9 SCIENCE AND TECHNOLOGY GROWTH FUND 10 DEVELOPING MARKETS GROWTH FUND 12 Principal Investment Risks 14 Performance BALANCED FUND 19 LARGE CAP GROWTH FUND 20 MID CAP GROWTH FUND 21 INTERNATIONAL GROWTH FUND 22 SMALL CAP GROWTH FUND 23 SCIENCE AND TECHNOLOGY GROWTH FUND 24 DEVELOPING MARKETS GROWTH FUND 25 Fees and Expenses 26 FUND MANAGEMENT Investment Adviser 28 Investment Sub-Adviser 29 Portfolio Management 29 Distributor 30 Custodian and Transfer Agent 30 SHAREHOLDER INFORMATION Share Price 31 When Orders are Effective 31 Investing Through a Third Party 32 Other Account Policies 32 Purchasing Shares 33 Selling Shares 34 General Rules for Purchasing & Selling Shares 35 Dividends and Distributions 36 Retirement and other Tax-Deferred Accounts 37 Taxes 37 Mailing of Regulatory Documents 38 Privacy Policy 38 ADDITIONAL INFORMATION Other Securities, Investment Practices, and Policies 39 Financial Highlights BALANCED FUND 41 LARGE CAP GROWTH FUND 42 MID CAP GROWTH FUND 43 INTERNATIONAL GROWTH FUND 44 SMALL CAP GROWTH FUND 45 SCIENCE AND TECHNOLOGY GROWTH FUND 46 DEVELOPING MARKETS GROWTH FUND 47 For More Information back cover FUND SUMMARIES INTRODUCTION SIT MUTUAL FUNDS ARE A FAMILY OF NO-LOAD MUTUAL FUNDS OFFERING A SELECTION OF FUNDS TO INVESTORS. EACH FUND HAS A DISTINCTIVE INVESTMENT OBJECTIVE AND RISK/REWARD PROFILE. THE SIT STOCK FUNDS CONSIST OF: DOMESTIC GROWTH STOCK FUNDS > Balanced Fund > Large Cap Growth Fund > Mid Cap Growth Fund > Small Cap Growth Fund > Science and Technology Growth Fund INTERNATIONAL GROWTH STOCK FUNDS > International Growth Fund > Developing Markets Growth Fund This Prospectus describes the seven stock funds that are a part of the Sit Mutual Fund family. The descriptions on the following pages may help you choose the Fund or Funds that best fit your investment goals. Keep in mind, however, that no Fund can guarantee it will meet its investment objective, and no Fund should be relied upon as a complete investment program. The Fund Summaries section describes the principal strategies used by the Funds in trying to achieve their objectives, and highlights the risks involved with these strategies. It also provides you with information about the performance, fees and expenses of the Funds. 1 FUND SUMMARIES BALANCED FUND INVESTMENT OBJECTIVE The Fund seeks long-term capital growth consistent with preservation of principal and seeks to provide shareholders with regular income. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing in a diversified portfolio of stocks and bonds. In seeking to achieve the Fund's long-term capital growth objective, the Fund invests in common stocks of growth companies. To provide shareholders with regular income, the Fund invests in fixed-income securities and/or common stocks selected primarily for their dividend payment potential. Between 35% and 65% of the Fund's assets will be invested in common stocks and between 35% and 65% in fixed-income securities. The Fund's allocation of assets will vary over time in response to the Adviser's evaluation of present and anticipated market and economic conditions. The equity portion of the Fund's portfolio is invested primarily in the common stocks of growth companies with a capitalization of $5 billion or more at the time of purchase. [LOGO] THE FUND COMBINES THE INVESTMENT STRATEGIES OF THE SIT LARGE CAP GROWTH FUND AND THE SIT BOND FUND. 2 FUND SUMMARIES BALANCED FUND CONTINUED In selecting equity securities for the Fund, the Adviser invests in growth-oriented companies it believes exhibit the potential for superior growth. The Adviser believes that a company's earnings growth is the primary deter minant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. The fixed-income portion of the Fund's portfolio is invested primarily in a diversified portfolio of debt securities that may include the following securities: > mortgage-backed securities, such as securities issued by Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA), and including collateralized mortgage obligations, > asset-backed securities collateralized by assets such as automobile and credit card receivables, utilities, manufactured (mobile) home loans, home improvement loans and home equity loans, > obligations of the U.S. government, its agencies and instrumentalities, > corporate debt securities, > taxable municipal securities, and > short-term debt obligations, including commercial paper and bank instruments, such as certificates of deposit, time deposits, and bankers' acceptances. 3 FUND SUMMARIES BALANCED FUND CONTINUED The Fund invests primarily in debt securities that, at the time of purchase, are either rated investment-grade or, if unrated, determined to be of comparable quality by the Adviser. Unrated securities will not exceed 20% of the fixed-income portion of the Fund's portfolio. In selecting fixed-income securities for the Fund, the Adviser seeks fixed-income securities providing maximum total return. In making purchase and sales decisions for the Fund, the Adviser considers its economic outlook and interest rate forecast, as well as its evaluation of a fixed-income security's credit quality, yield, maturity, and liquidity. Based upon its economic outlook, the Adviser attempts to shift the fixed-income sector concentrations of the portfolio. Based upon its interest rate forecast, the Adviser attempts to shift the fixed-income portfolio's average effective duration, seeking to maintain an average effective duration for the fixed-income portion of the Fund's portfolio of 3 to 7 years. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk, Interest Rate Risk, Prepayment Risk, Credit Risk, Income Risk and Call Risk. See pages 14-15 for a discussion of these risks. 4 FUND SUMMARIES LARGE CAP GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks to maximize long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 80% of its net assets in the common stocks of companies with capitalizations of $5 billion or more at the time of purchase. The Adviser invests in domestic growth-oriented companies it believes exhibit the potential for superior growth. The Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk and Management Risk. See page 14 for a discussion of these risks. [LOGO] THE FUND INVESTS IN COMPANIES HAVING A MARKET CAPITALIZATION OF $5 BILLION OR MORE. [LOGO] THE FUND FOCUSES ON "BLUE CHIP" STOCKS ISSUED BY COMPANIES WITH LONG RECORDS OF PROFIT GROWTH. 5 FUND SUMMARIES MID CAP GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks to maximize long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 80% of its net assets in the common stocks of companies with capitalizations of $2 billion to $15 billion at the time of purchase. The Adviser invests in domestic growth-oriented medium to small companies it believes exhibit the potential for superior growth. The Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk and Smaller Company Risk. See pages 14-15 for a discussion of these risks. [LOGO] THE FUND INVESTS IN COMPANIES HAVING A MARKET CAPITALIZATION OF $2 BILLION TO $15 BILLION. 6 FUND SUMMARIES INTERNATIONAL GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks long-term growth. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 90% of its net assets in common stocks of companies domiciled outside the United States. In selecting investments for the Fund, the Sub-Adviser begins by selecting countries or regions in which to invest. In making its selections, the Sub-Adviser considers several factors affecting the economy and equity market of foreign countries and regions, including: > economic trends, > earnings outlook, > liquidity within the market, > fiscal and monetary policy, > currency exchange rate expectations, > market sentiment, and > social and political trends. After the country and regional allocations are determined, the Sub-Adviser seeks industries and sectors that it believes have earnings growth prospects that are greater than the average. Within the selected industries and sectors, the Sub-Adviser invests in foreign growth-oriented companies it believes exhibit the potential for superior growth. The Sub-Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: 7 FUND SUMMARIES INTERNATIONAL GROWTH FUND CONTINUED > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. The Fund invests in common stocks of issuers domiciled in at least three foreign countries. Up to 50% of the Fund's total assets may be invested in equity securities of small- to medium-sized emerging growth companies in developed markets (such as Germany and Japan) and developing markets (such as Thailand and Brazil). Emerging growth companies are small- and medium-sized companies that the Sub-Adviser believes have a potential for earnings growth over time that is above the growth rate of more established companies or are early in their life cycles. The Fund may invest in securities representing underlying international securities such as American Depository Receipts, European Depository Receipts and Global Depository Receipts. In order to hedge against adverse movements in currency exchange rates, the Fund may from time to time enter into forward foreign currency exchange contracts. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk, Risk of International Investing, Currency Risk, Liquidity Risk, Political and Economic Risk, Foreign Tax Risk, Risk of Investment Restrictions, Foreign Securities Market Risk, Information Risk, Risk of Developing Markets and Risk of Foreign Currency Hedging Transactions. See pages 14-18 for a discussion of these risks. 8 FUND SUMMARIES SMALL CAP GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks to maximize long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 80% of its net assets in common stocks of companies with capitalizations of $2.5 billion or less at the time of purchase. The Adviser invests in domestic growth-oriented small companies it believes exhibit the potential for superior growth. The Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk, Smaller Company Risk and Liquidity Risk. See pages 14-15 for a discussion of these risks. [LOGO] THE FUND INVESTS IN COMPANIES HAVING A MARKET CAPITALIZATION OF $2.5 BILLION OR LESS. 9 FUND SUMMARIES SCIENCE AND TECHNOLOGY GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks to maximize long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 80% of its net assets in common stocks of companies principally engaged in science and technology business activities. Such companies include those whose assets, gross income, or net profits are significantly committed to, or derived from, science and technology. The Adviser seeks stocks of science and technology companies having superior growth potential in virtually any industry in which they may be found. These industries may include: > aerospace, > chemistry, > electronic technology (including electronic components, computer systems and peripherals and networking equipment), > environmental services, > genetic engineering, > geology, > information sciences (including software, telecommunication, data processing and information technology services), > medicine (including pharmacology, biotechnology and biophysics), and > hospital supply and medical devices. 10 FUND SUMMARIES SCIENCE AND TECHNOLOGY GROWTH FUND CONTINUED The Adviser invests in growth-oriented companies it believes exhibit the potential for superior growth. The Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. The Fund's investments will include stocks of small, mid and large cap companies. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > dominant and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk, Smaller Company Risk and Technology Stock Risk. See pages 14-16 for a discussion of these risks. 11 FUND SUMMARIES DEVELOPING MARKETS GROWTH FUND INVESTMENT OBJECTIVE The Fund seeks to maximize long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by investing at least 80% of its net assets in common stocks of companies domiciled or operating in a developing market. Developing markets are those countries that: > have emerging stock markets as defined by the International Finance Corporation, > have low- to middle-income economies according to the World Bank, or > are listed in World Bank publications as "developing." As of September 30, 2001, the Fund held investments in Hong Kong, Indonesia, Philippines, South Korea, Taiwan, Thailand, Greece, Spain, Brazil, Mexico, Israel, South Africa, Australia, China, India, Malaysia and Singapore. In selecting investments for the Fund, the Sub-Adviser begins by selecting countries or regions in which to invest. In making its selections, the Sub-Adviser considers several factors affecting the economy and equity market of foreign countries and regions, including: > economic trends, > earnings outlook, > liquidity within the market, > fiscal and monetary policy, > currency exchange rate expectations, > investment valuation, > market sentiment, and > social and political trends. 12 FUND SUMMARIES DEVELOPING MARKETS GROWTH FUND CONTINUED After the country and regional allocations are determined, the Sub-Adviser seeks industries and sectors that appear to have strong earnings growth prospects. Within the selected industries and sectors, the Sub-Adviser invests in foreign growth-oriented companies it believes exhibit the potential for superior growth. The Sub-Adviser believes that a company's earnings growth is the primary determinant of its potential long-term return and evaluates a company's potential for above average long-term earnings and revenue growth. Several factors are considered in the Adviser's evaluation of a company, including: > unique product or service, > growing product demand, > regional or country dominance and growing market share, > management experience and capabilities, and > strong financial condition. When selling equity securities for the Fund, the Sub-Adviser considers several factors, including changes in a company's fundamentals and anticipated earnings. The Fund may invest in securities representing underlying international securities such as American Depository Receipts, European Depository Receipts and Global Depository Receipts. In order to hedge against adverse movements in currency exchange rates, the Fund may from time to time enter into forward foreign currency exchange contracts. RISKS You could lose money by investing in the Fund. The principal risks of investing in the Fund are Stock Market Risk, Management Risk, Risk of International Investing, Currency Risk, Liquidity Risk, Political and Economic Risk, Foreign Tax Risk, Risk of Investment Restrictions, Foreign Securities Market Risk, Information Risk, Risk of Developing Markets and Risk of Foreign Currency Hedging Transactions. See pages 14-18 for a discussion of these risks. 13 FUND SUMMARIES PRINCIPAL INVESTMENT RISKS All investments carry some degree of risk which will affect the value of a Fund's investments, investment performance, and price of its shares. IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUNDS. The principal risks of investing in the Funds include: RISKS THAT APPLY TO ALL FUNDS > Stock Market Risk: The value of the stocks in which a Fund invests may go up or down in response to the activities of individual companies, the stock market and general eco nomic conditions. Stock prices may decline over short or extended periods. > Management Risk: A strategy used by the investment management team may not produce the intended results. RISKS THAT APPLY PRIMARILY TO THE BALANCED FUND > Interest Rate Risk: Due to the Fund's investments in fixed-income securities, an increase in interest rates may lower the Fund's value and the overall return on your investment. The magnitude of this decrease is often greater for longer-term fixed-income securities than shorter-term securities. > Prepayment Risk: Declining interest rates may compel borrowers to prepay mortgages and debt obligations underlying the mortgage-backed securities and asset-backed securities owned by the Fund. The proceeds received by the Fund from prepayments will likely be reinvested at interest rates lower than the original investment, thus resulting in a reduction of income to the Fund. Likewise, rising interest rates could reduce prepayments and extend the life of securities with lower interest rates, which may increase the sensitivity of the Fund's value to rising interest rates. 14 FUND SUMMARIES > Credit Risk: The issuers or guarantors of fixed-income securities owned by the Fund may default on the payment of principal or interest or on other obligations to the Fund, causing the value of the Fund to decrease. > Income Risk: The income you earn from the Fund may decline due to declining interest rates. > Call Risk: Many bonds may be redeemed ("called") at the option of the issuer before their stated maturity date. In general, an issuer will call its bonds if they can be refinanced by issuing new bonds which bear a lower interest rate. The Fund would then be forced to invest the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund's income. RISK THAT APPLIES PRIMARILY TO THE MID CAP GROWTH, SMALL CAP GROWTH, AND SCIENCE AND TECHNOLOGY GROWTH FUNDS > Smaller Company Risk: Stocks of smaller companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, or may be dependent upon a small or inexperienced management group. In addition, small cap stocks typically are traded in lower volume, and their issuers typically are subject to greater degrees of change in their earnings and prospects. RISK THAT APPLIES PRIMARILY TO THE SMALL CAP GROWTH FUND > Liquidity Risk: Certain securities may be difficult to sell at the time and price that the Adviser would like to sell. The Adviser may have to lower the selling price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund performance. During unusual market conditions, unusually high volume of redemption requests or other reasons, the Fund may not be able to pay redemption proceeds within the time periods described in this Prospectus. 15 FUND SUMMARIES RISK THAT APPLIES PRIMARILY TO THE SCIENCE AND TECHNOLOGY GROWTH FUND > Technology Stock Risk: Stocks of science and technology companies may be subject to greater price volatility than stocks of companies in other sectors or the overall stock market. Science and technology companies may produce or use products or services that prove commercially unsuccessful, become obsolete or become adversely impacted by government regulation. Technology stocks may experience significant price move ments caused by disproportionate investor optimism or pessimism. The Fund may be more affected by events influencing these sectors than a fund that is more diversified across numerous sectors. RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL GROWTH AND DEVELOPING MARKETS GROWTH FUNDS > Risk of International Investing: International investing involves risks not typically associated with domestic investing. Because of these risks, and because of the Sub-Adviser's ability to invest substantial portions of the Funds' assets in a small number of countries, the Funds may be subject to greater volatility than mutual funds that invest principally in domestic securities. > Currency Risk: The value of the Funds' securities computed in U.S. dollars will vary with increases and decreases in exchange rates. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of a Fund's holdings of securities denominated in that currency. > Political and Economic Risk: Investing in securities of non-U.S. companies may entail additional risks due to the potential political, social and economic instability of certain countries, changes in international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets and nationalization of assets. 16 FUND SUMMARIES > Foreign Tax Risk: Each Fund's income from foreign issuers may be subject to non-U.S. withholding taxes. In some countries, the Funds also may be subject to taxes on trading profits and, on certain securities transactions, transfer or stamp duties tax. To the extent foreign income taxes are paid by a Fund, U.S. shareholders may be entitled to a credit or deduction for U.S. tax purposes. See the Statement of Additional Information for details. > Risk of Investment Restrictions: Some countries, particularly developing markets, restrict to varying degrees foreign investment in their securities markets. In some circumstances, these restrictions may limit or preclude investment in certain countries or may increase the cost of investing in securities of particular companies. > Foreign Securities Market Risk: Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. Securities of companies traded in many countries outside the U.S., particularly developing markets countries, may be subject to further risks due to the inexperience of local brokers and financial institutions, the possibility of permanent or temporary termination of trading, and greater spreads between bid and asked prices for securities. In addition, non-U.S. stock exchanges and brokers are subject to less governmental regulation, and commissions may be higher than in the United States. Also, there may be delays in the settlement of non-U.S. stock exchange transactions. > Liquidity Risk: Certain securities of non-U.S. companies may be difficult to sell at the time and price that the Adviser would like to sell. The Adviser may have to lower the selling price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on Fund performance. During unusual market conditions, unusually high volume of redemption requests or other reasons, the Fund may not be able to pay redemption proceeds within the time periods described in Prospectus. 17 FUND SUMMARIES > Information Risk: Non-U.S. companies generally are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements that apply to U.S. companies. As a result, less information may be available to investors concerning non-U.S. issuers. Accounting and financial reporting standards in developing markets may be especially lacking. > Risk of Developing Markets: Investing in securities of issuers in developing markets involves exposure to economic infrastructures that are generally less diverse and mature than, and to political systems that can be expected to have less stability than, those of developed countries. Other characteristics of developing market countries that may affect investment in their markets include certain governmental policies that may restrict investment by foreigners and the absence of developed legal structures governing private and foreign investments and private property. The typical small size of the markets for securities issued by issuers located in developing markets and the possi bility of low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities. In addition, issuers in developing markets typically are subject to a greater degree of change in earnings and business prospects than are companies in developed markets. > Risk of Foreign Currency Hedging Transactions: If the Sub-Adviser's forecast of exchange rate movements is incorrect, the Funds may realize losses on their foreign currency transactions. In addition, the Funds' hedging transactions may prevent the Funds from realizing the benefits of a favorable change in the value of foreign currencies. 18 FUND SUMMARIES PERFORMANCE The following information illustrates how each Fund's performance has varied over time, which is one indication of the risks of investing in a Fund. A Fund's past performance does not necessarily indicate how it will perform in the future. Each bar chart depicts the change in a Fund's performance from year to year. Each table depicts a Fund's average annual total returns for the periods indicated. Both the charts and the tables assume that all distributions have been reinvested. BALANCED FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] -0.33% 25.43% 15.80% 21.73% 21.30% 20.15% -4.80% --------------------------------------------------------------------- 1994 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -19.78%. Best Quarter: 15.59% (4th Q 1999) Worst Quarter: -7.70% (4TH Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 Since Inception 1-Year 5-Years (12/31/93) ------------------------------------------------------------------------------- BALANCED FUND -4.80% 14.36% 13.61% S&P 500 Index(1) -9.11% 18.33% 17.37% Lehman Aggregate Bond Index(2) 11.63% 6.46% 6.68% (1) An unmanaged index which measures the performance of 500 widely held common stocks of large-cap companies. (2) An unmanaged index which measures the performance of U.S. investment-grade bonds. It is composed of investment- grade securities from the Lehman Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. 19 FUND SUMMARIES LARGE CAP GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] 32.72% 4.94% 3.15% 2.83% 31.66% 23.05% 31.70% 30.56% 33.41% -13.84% -------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -37.16%. Best Quarter: 26.01% (4th Q 1999) Worst Quarter: -15.51% (4th Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 1-Year 5-Years 10-Years ------------------------------------------------------------------------------- LARGE CAP GROWTH FUND -13.84% 19.45% 16.81% S&P 500 Index(1) -9.11% 18.33% 17.46% Russell 1000 Growth Index(2) -22.42% 18.15% 17.33% (1) An unmanaged index which measures the performance of 500 widely held common stocks of large cap companies. (2) An unmanaged index which measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. 20 FUND SUMMARIES MID CAP GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] 65.50% -2.14% 8.55% -0.47% 33.64% 21.87% 17.70% 6.84% 70.65% -4.35% ------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -46.60%. Best Quarter: 45.95% (4th Q 1999) Worst Quarter: -23.00% (4th Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 1-Year 5-Years 10-Years ------------------------------------------------------------------------------- MID CAP GROWTH FUND -4.35% 20.13% 19.32% S&P MidCap 400 Index(1) 17.50% 20.42% 19.86% Russell MidCap Growth Index(2) -11.75% 17.77% 18.10% (1) An unmanaged index which measures the performance of 400 widely held common stocks of mid cap companies. (2) An unmanaged index which measures the performance of those Russell Midcap companies with higher price-to- book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. 21 FUND SUMMARIES INTERNATIONAL GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] 2.69% 48.37% -2.99% 9.36% 10.31% 4.81% 18.95% 50.77% -26.66% ------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -37.32%. Best Quarter: 38.12% (4th Q 1999) Worst Quarter: -14.87% (2nd Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 Since Inception 1-Year 5-Years (11/1/91) ------------------------------------------------------------------------------- INTERNATIONAL GROWTH FUND -26.66% 8.75% 10.78% Morgan Stanley Capital Int'l EAFE Index(1) -14.17% 7.13% 7.70% Lipper International Fund Index(2) -14.72% 10.20% 10.15% (1) An unmanaged index which measures the performance of international companies screened for liquidity, cross ownership, and industry representation within the stock markets of Europe, Australia, New Zealand, and the Far East. (2) An equally weighted index composed of the largest mutual funds, within the international fund classification, adjusted for the reinvestment of capital gains distributions and income dividends. International funds are those funds that invest fund assets in securities with primary trading markets outside of the United States. 22 FUND SUMMARIES SMALL CAP GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] 52.16% 14.97% 7.63% 1.97% 108.63% 6.25% --------------------------------------------------------- 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -38.74%. Best Quarter: 64.59% (4th Q 1999) Worst Quarter: -19.70 (4th Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 Since Inception 1-Year 5-years (7/1/94) ------------------------------------------------------------------------------- SMALL CAP GROWTH FUND 6.25% 22.84% 27.05% Russell 2000 Index(1) -3.02% 10.31% 12.84% Russell 2000 Growth Index(2) -22.43% 7.14% 12.84% (1) An unmanaged index which measures the performance of the 2,000 smallest companies in the Russell 3000 Index (an index of the 3,000 largest U.S. companies based on total market capitalization). (2) An unmanaged index which measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. 23 FUND SUMMARIES SCIENCE AND TECHNOLOGY GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] 38.40% 85.98% -6.55% ------------------------------ 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -57.95% Best Quarter: 55.15% (4th Q 1999) (Worst Quarter: -30.86% (4th Q 2000) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 Since Inception 1-Year (12/31/97) ------------------------------------------------------------------------------- SCIENCE AND TECHNOLOGY GROWTH FUND -6.55% 33.95% S&P 500 Index(1) -9.11% 17.37% (1) An unmanaged index which measures the performance of 500 widely held common stocks of large-cap companies. 24 FUND SUMMARIES DEVELOPING MARKETS GROWTH FUND TOTAL RETURN FOR THE CALENDAR YEARS ENDED 12/31(1) [BAR CHART] -4.29% 17.27% -5.20% -24.93% 82.50% -30.18% ------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 (1) The Fund's year-to-date return as of 9/30/01 (not annualized) was -27.58%. Best Quarter: 48.17% (4th Q 1999) Worst Quarter: -23.09% (3rd Q 1998) AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/00 Since Inception 1-Year 5-Year (7/1/94) ------------------------------------------------------------------------------- DEVELOPING MARKETS GROWTH FUND -30.18% 1.24% -0.04% MSCI Emerging Markets Free Index(1) -31.80% -6.15% -5.40% Lipper Emerging Market Fund Index(2) -30.90% -2.97% -3.01% (1) An unmanaged index which measures the performance of over 1,000 international emerging companies representing the stock markets of over 25 countries. (2) An equally weighted index composed of the largest mutual funds within the emerging market fund classification, adjusted for the reinvestment of capital gains distributions and income dividends. Emerging market funds are those funds that seek long-term capital appreciation by investing at least 65% of total assets in emerging market equity securities, where "emerging market" is defined by a country's GNP per capita or other economic measures. 25 FUND SUMMARIES FEES AND EXPENSES This table shows fees and expenses that you may pay if you buy and hold shares of the Funds. All Sit Mutual Funds are no-load investments, so you will not pay any share holder fees such as sales loads, redemption fees or exchange fees when you buy or sell shares of the Funds. However, when you hold shares of a Fund you indirectly pay a portion of the Fund's operating expenses. These expenses are deducted from Fund assets. SHAREHOLDER FEES (fees paid directly from your investment) None ----------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES AS A % OF AVERAGE NET ASSETS ----------------------------------------------------------------------------- Management Distribution Other Total Annual Fees (12b-1) Fees Expenses Fund Operating Expenses Balanced 1.00% None None 1.00% Large Cap Growth 1.00% None None 1.00% Mid Cap Growth 1.25%(1) None None 1.25%(1) International Growth 1.85%(1) None None 1.85%(1) Small Cap Growth 1.50% None None 1.50% Science and Technology Growth 1.50%(1) None None 1.50%(1) Developing Markets Growth 2.00% None None 2.00% ----------------------------------------------------------------------------- (1) Management fees do not reflect the Adviser's waiver of fees. Actual expenses are lower than those shown in the table because of voluntary fee waivers by the Adviser. As a result of the fee waivers, actual management fees paid by the Mid Cap Growth, International Growth, and Science and Technology Growth Funds were 1.06%, 1.50% and 1.29%, respectively, of the Fund's average daily net assets at June 30, 2001. Effective January 1, 2001, the Adviser agreed to voluntarily waive the management fees of the Mid Cap Growth, International Growth and Science and Technology Growth Funds so that actual management fees paid by the Funds will be 1.15%, 1.50% and 1.35%, respectively, of the Fund's average daily net assets. After December 31, 2002, these fee waivers may be terminated at any time by the Adviser. 26 FUND SUMMARIES EXAMPLE This example is intended to help you compare the cost of investing in each Fund (before the fee waiver) with the cost of investing in other mutual funds. It assumes that you invest $10,000 in a Fund for the time periods indicated (with reinvestment of all dividends and distributions), that your investment has a 5% return each year, that the Fund's operating expenses remain the same, and that you redeem all of your shares at the end of those periods. Although your actual costs and returns may differ, based on these assumptions your costs would be: 1-Year 3-Years 5-Years 10-Years -------------------------------------------------------------------------------- Balanced $103 $320 $555 $1,229 Large Cap Growth $103 $320 $555 $1,229 Mid Cap Growth $128 $399 $690 $1,518 International Growth $190 $587 $1,009 $2,184 Small Cap Growth $154 $477 $824 $1,801 Science and Technology Growth $154 $477 $824 $1,801 Developing Markets Growth $205 $633 $1,087 $2,345 27 FUND MANAGEMENT INVESTMENT ADVISER Sit Investment Associates, Inc. (the "Adviser"), 90 South Seventh Street, Suite 4600, Minneapolis, Minnesota 55402, is the Funds' investment adviser. The Adviser was founded in 1981 and provides investment management services for both public and private clients. As of September 30, 2001, the Adviser and its affiliates had approximately $7.1 billion in assets under management, including approximately $1.6 billion for the 12 Sit Mutual Funds. Under Investment Management Agreements between each Fund and the Adviser (the "Agree ments"), the Adviser manages each Fund's business and investment activities, subject to the authority of the board of directors. The Agreements require the Adviser to bear each Fund's expenses except interest, brokerage commissions and transaction charges and certain extra ordinary expenses. Each Fund pays the Adviser a monthly fee for its services. During their most recent fiscal year, after taking into account voluntary fee waivers, the Funds paid the following advisory fees to the Adviser: ADVISORY FEE AS A % OF FUND AVERAGE DAILY NET ASSETS -------------------------------------------------------------------------------- Balanced Fund 1.00% Large Cap Growth Fund 1.00% Mid Cap Growth Fund 1.06%(1) International Growth Fund 1.50%(1) Small Cap Growth Fund 1.50% Science and Technology Growth Fund 1.29%(1) Developing Markets Growth Fund 2.00% -------------------------------------------------------------------------------- (1) Net of voluntary fee waivers. The contractual fees (without waivers) for the Mid Cap Growth, International Growth, and Science and Technology Growth Funds are 1.25%, 1.85%, and 1.50%, per year, respectively, of the Fund's average daily net assets. After December 31, 2002, fee waivers may be terminated at any time by the Adviser. 28 FUND MANAGEMENT INVESTMENT SUB-ADVISER Sit/Kim International Investment Associates, Inc. (the "Sub-Adviser"), 90 South Seventh Street, Suite 4600, Minneapolis, Minnesota 55402, is the Sub-Adviser for the Developing Markets Growth and Inter national Growth Funds. The Sub-Adviser was founded in 1989 and is a majority owned subsidiary of the Adviser. The Sub-Adviser is an international investment management firm and together with its affiliate, as of September 30, 2001, had approximately $1.4 billion in assets under management. The Sub-Adviser has offices in New York and San Francisco. Under a Sub-Advisory Agreement with the Adviser, the Adviser pays the Sub-Adviser a portion of its advisory fee for managing the Developing Markets Growth and International Growth Funds' investment activities. PORTFOLIO MANAGEMENT The Funds' investment decisions are made by a team. Eugene C. Sit is the Adviser's Chief Investment Officer and oversees the investment decisions for the Funds. Peter L. Mitchelson is the Adviser's President and Chief Strategist. Roger J. Sit is the Adviser's Executive Vice President - Research and Investment Management. Mr. Eugene C. Sit and Mr. Mitchelson have been with the Adviser and each of the Funds since their inception. Mr. Roger Sit joined the Adviser in early 1998 with 9 years of investment management experience. Sit/Kim International Investment Associates, Inc. is the Sub-Adviser for the International Growth Fund and the Developing Markets Growth Fund. Eugene C. Sit is the Sub-Adviser's Chief Investment Officer. Roger J. Sit is Deputy Chief Investment Officer of the Sub-Adviser. Mr. Eugene Sit has been with the Sub-Adviser and the international funds since their inception. Mr. Roger Sit joined the Sub-Adviser in early 1998 with 9 years of investment management experience. 29 FUND MANAGEMENT DISTRIBUTOR SIA Securities Corp. (the "Distributor"), an affiliate of the Adviser, is the distributor for the Funds. The Distributor markets the Funds' shares only to certain institutional and individual investors and all other sales of the Funds' shares are made by each Fund. The Distributor or the Adviser may enter into agreements under which various financial institutions and brokerage firms provide administrative services for customers who are beneficial owners of shares of the Funds. The Distributor or Adviser may compensate these firms for the services provided, with compen sation based on the aggregate assets of customers that are invested in the Funds. CUSTODIAN AND TRANSFER AGENT The Northern Trust Company, located at 50 South LaSalle Street, Chicago, IL 60675, is the Custodian for the Funds. PFPC Inc., located at 4400 Computer Drive, Westboro, MA 01581, is the Transfer Agent for the Funds. [LOGO] THE CUSTODIAN HOLDS THE FUNDS' SECURITIES AND CASH, RECEIVES AND PAYS FOR SECURITIES PURCHASED, DELIVERS AGAINST PAYMENT FOR SECURITIES SOLD, RECEIVES AND COLLECTS INCOME FROM INVESTMENTS AND PERFORMS OTHER ADMINISTRATIVE DUTIES. [LOGO] THE TRANSFER AGENT PROCESSES PURCHASE ORDERS, REDEMPTION ORDERS AND HANDLES ALL RELATED SHAREHOLDER ACCOUNTING SERVICES. 30 SHAREHOLDER INFORMATION SHARE PRICE Your price for purchasing, selling, or exchanging shares is based on the Fund's net asset value ("NAV") per share, which is calculated as of the close of regular trading on the New York Stock Exchange ("NYSE") (generally 3:00 p.m. Central time) every day the exchange is open. The NAV per share of the Funds will fluctuate. NAV is based on the market value of the securities in a Fund's portfolio. When market value prices are not readily available, fair value is determined in good faith by the Adviser using methods approved by the board of directors. Short-term debt securities maturing in less than 60 days are valued at amortized cost. The amortized cost method of valuation initially values a security at its purchase cost, then consis tently adjusts the cost value by amortizing/accreting any discount or premium paid until the security's maturity without regard to fluctuating interest rates. International Growth Fund and Developing Markets Growth Fund will hold portfolio securities that trade on weekends or other days when the Funds do not price their shares. Therefore, the value of these Funds' shares may change on days when you will be unable to purchase or redeem their shares. WHEN ORDERS ARE EFFECTIVE Purchase, exchange, and sale orders are received and may be accepted by Sit Mutual Funds only on days the NYSE is open. PURCHASE, EXCHANGE, AND SALE ORDERS RECEIVED PRIOR TO THE CLOSE OF THE NYSE (GENERALLY 3:00 P.M. CENTRAL TIME) ARE PROCESSED AT THE NET ASSET VALUE PER SHARE CALCULATED FOR THAT BUSINESS DAY, EXCEPT PURCHASES MADE TO AN EXISTING ACCOUNT VIA AUTOMATED CLEARING HOUSE, "ACH," ELECTRONIC TRANSFER OF FUNDS. ACH PURCHASES ARE INVESTED AT THE NET ASSET VALUE PER SHARE ON THE NEXT BUSINESS DAY AFTER YOUR TELEPHONE CALL TO THE FUNDS IF YOU CALL THE FUNDS PRIOR TO THE CLOSE OF THE NYSE. Your bank account will be debited within 1 to 2 business days. [LOGO] A FUND'S SHARE PRICE OR NAV IS DETERMINED BY ADDING THE TOTAL VALUE OF A FUND'S INVESTMENTS AND OTHER ASSETS (INCLUDING ACCRUED INCOME), SUBTRACTING ITS LIABILITIES, AND THEN DIVIDING THAT FIGURE BY THE NUMBER OF OUTSTANDING SHARES OF THE FUND. 31 SHAREHOLDER INFORMATION IF YOUR PURCHASE, EXCHANGE, OR SALE ORDER IS RECEIVED AFTER THE CLOSE OF THE NYSE, THE PURCHASE, EXCHANGE OR SALE WILL BE MADE AT THE NET ASSET VALUE CALCULATED ON THE NEXT DAY THE NYSE IS OPEN. INVESTING THROUGH A THIRD PARTY There is no charge to invest, exchange, or sell shares when you make transactions directly through Sit Mutual Funds. Certain Funds may be available for purchase through a third party financial institution. If you invest in the Funds through a third party, rather than directly with Sit Mutual Funds, the fees and policies may be different than described in this Prospectus. Banks, brokers, 401(k) plans, financial advisors, and financial supermarkets may charge commissions and transaction fees and may set different minimum investments or limitations on purchasing or selling shares. Consult a representative of your plan or financial institution if you are unsure of their fees and policies. OTHER ACCOUNT POLICIES PURCHASE RESTRICTIONS The Funds may reject or restrict any purchase or exchange order at any time, when, in the judgment of management, it is in the best interests of the Funds. For example, it may be in the best interests of the Funds to reject purchase and exchange orders that are short-term or to restrict excessive trading into and out of the Funds since such orders may harm performance by disrupting portfolio management strategies and increasing expenses. ACCOUNTS WITH LOW BALANCES If your account balance in a Fund falls below $5,000 as a result of selling or exchanging shares, the Fund has the right to redeem your shares and send you the proceeds. Before redeeming your account, the Fund will mail you a notice of its intention to redeem, which will give you an opportunity to make an additional investment. If you do not increase the value of your account to at least $5,000 within 30 days of the date the notice was mailed, the Fund may redeem your account. 32 SHAREHOLDER INFORMATION PURCHASING SHARES TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT ------------------------------------- -------------------------------------- BY MAIL ------- Mail a completed account application Mail a completed investment slip for a and your check payable to: particular fund (which you received in your account statement) or a letter of Sit Mutual Funds instruction, with a check payable to: P.O. Box 5166 Westboro, MA 01581-5166 Sit Mutual Funds P.O. Box 5166 Third party checks or starter checks Westboro, MA 01581-5166 are not accepted for initial purchases. A letter of instruction must include your account number, the name(s) of Please be sure to complete the entire the registered owner(s) and the application, including the selection Fund(s) that you want to purchase. of which Fund(s) you want to purchase. Starter checks are not accepted for additional purchases. ------------------------------------- -------------------------------------- BY TELEPHONE ------------ Fax a completed account application to PAYMENT BY WIRE. Instruct your bank to Sit Mutual Funds at 612-342-2111, and wire your investment to the Sit Mutual then call us at 1-800-332-5580 or Funds using the wire instructions on 612-334-5888 for a new account number the back of the prospectus. Call us at and bank wiring instructions. 1-800-332-5580 or 612-334-5888 and notify us of the wire. Instruct your bank to wire your investment to us using the wire PAYMENT BY ACH. Call us at instructions we have given you. Your 1-800-332-5580 or 612-334-5888 to bank may charge a wire fee. Mail the request that a purchase be made original signed account application electronically from your bank account. to: The purchase will be effective on the next business day following your Sit Mutual Funds telephone request made prior to the P.O. Box 5166 close of the NYSE. Westboro, MA 01581-5166 Before using the ACH feature, you must NOTE FOR IRA ACCOUNTS: An IRA account set up the ACH option on your initial cannot be opened over the telephone. account application or a Change of Account Options Form. ------------------------------------- -------------------------------------- AUTOMATICALLY ------------- You cannot make an initial purchase You may set up an Automatic Investment automatically. Plan on your initial account application or on a Change of Account Options Form. The Plan will invest in the Selected Fund electronically from your bank account (via ACH) on any day the Funds are open - either monthly, quarterly or annually. ------------------------------------- -------------------------------------- Please see page 35 for additional general rules for purchasing and selling shares. 33 SHAREHOLDER INFORMATION SELLING SHARES TO EXCHANGE SHARES TO SELL SHARES ------------------------------------- -------------------------------------- BY MAIL ------- You may sell shares of one Sit Fund Mail a written request that includes: and purchase shares of another Sit Fund by mailing a letter of * Account number, instruction signed by all registered * Names and signatures of all owners of the account to: registered owners exactly as they appear on the account, Sit Mutual Funds * Name of Fund and number of shares P.O. Box 5166 or dollor amount you want to Westboro, MA 01581-5166 sell, * Medallion signature guarantee(s) A letter of instruction must include if you have requested that the your account number, the name(s) and proceeds from the sale be: the number of shares or dollar amount * paid to anyone other of the Fund(s) you want to sell and than the registered the name(s) of the Fund(s) you want to account owners, purchase. * paid by check and mailed to an address other than the registered address, or * sent via bank wire (currently an $8 fee) to a bank different than the bank authorized by you on your account application. * Supporting legal documents, if required (see "General Rules" on following page) * Method of payment (check, wire transfer, or ACH, see "General Rules" on following page) NOTE FOR IRA ACCOUNTS: Mail a signed IRA Distribution Form to Sit Mutual Funds. ------------------------------------- -------------------------------------- BY TELEPHONE ------------ You may sell shares of one Sit Fund Call us at 1-800-332-5580 or and purchase shares of another Sit 612-334-5888 and request a sale of Fund by calling us at 1-800-332-5580 shares. or 612-334-5888. If you call after business hours, you will need your Before selling shares by telephone, Personal Identification Number to use you must set up the option on your the automatic telephone system. initial account application or a Change of Account Options Form. Proceeds from the sale will be sent as directed on your application by check, bank wire or ACH. The Funds' bank charges a wire fee to send the proceeds via bank wire (currently $8). NOTE FOR IRA ACCOUNTS: A sale of shares from an IRA account cannot be made over the telephone. Mail a completed IRA Distribution Form to Sit Mutual Funds. ------------------------------------- -------------------------------------- AUTOMATICALLY ------------- You may set up an Automatic Exchange Shares may be sold through the Plan on your initial account Automatic Withdrawal Plan (minimum application or on a Change of Account $100) if the Special Services section Options Form. The Plan will sell of the initial account application is shares of one Sit Fund and invest in complete. another Sit Fund automatically on any day the Funds are open - either You may add this option by completing monthly, quarterly or annually. a Change of Account Options Form, and this option will begin within 10 days of the Funds' receipt of the form. Proceeds from the sale will be sent as directed on your account application, by check or ACH. ------------------------------------- -------------------------------------- Please see page 35 for additional general rules for purchasing and selling shares. 34 SHAREHOLDER INFORMATION GENERAL RULES FOR PURCHASING AND SELLING SHARES PURCHASING SHARES EXCHANGING SHARES ------------------------------------- -------------------------------------- Shares may be purchased on any day the You may sell shares of one or more Sit NYSE is open with a minimum initial Funds and use the proceeds to buy investment of $5,000 per Fund. shares of another Sit Fund at no cost. IRA accounts (regular, Roth and SEP) Before making an exchange, please read require a minimum initial investment the prospectus and consider the of $2,000 per Fund. investment objective of the Fund you are purchasing. Additional investments in any account must be at least $100. An exchange of shares is a sale for federal income tax purposes and you may have a taxable capital gain or loss. ------------------------------------- -------------------------------------- SELLING SHARES RECEIPT OF SALE PROCEEDS ------------------------------------- -------------------------------------- Your sale proceeds will be paid as You may receive proceeds from the soon as possible, generally not later sales of your shares in one of three than 7 business days after the Funds' ways: receipt of your request to sell. However, if you purchased shares with (1) By Mail nonguaranteed funds, such as a Your check will generally be mailed to personal check, and you sell shares, the address of record within 7 your sale proceeds payment will be business days after receipt of your delayed until your check clears, which request. may take 15 days. (2) By Wire OTHER DOCUMENTS: Under certain Your bank account will generally be circumstances, sales of shares may credited within 1 to 2 business days require additional legal after receipt of your request. The documentation, such as sales by Funds' bank charges a wire fee estates, trusts, guardianships, (currently $8) which will be deducted custodianships, corporations, pension from the balances of your account or and profit sharing plans and other from the amount being wired if your organizations. account has been completely redeemed. The recipient bank may also charge a MEDALLION SIGNATURE GUARANTEE: A wire fee. medallion signature guarantee assures that a signature is genuine and (3) By ACH protects shareholders from Your bank account will generally be unauthorized account transactions. A credited within 1 to 2 business days medallion signature guarantee may be after receipt of your request. obtained from a bank, brokerage firm, Proceeds from the sale of shares from or other financial institution that is an IRA account cannot be paid using participating in a medallion program ACH. recognized by the Securities Transfer Association. A notary public stamp cannot be substituted for a medallion signature guarantee. ------------------------------------- -------------------------------------- 35 SHAREHOLDER INFORMATION DIVIDENDS AND DISTRIBUTIONS The Balanced Fund distributes quarterly dividends from its net investment income. Each of the other Funds distributes an annual dividend from its net investment income. Net investment income includes dividends on stocks and interest earned on bonds or other debt securities less operating expenses. Capital gains, if any, are distributed at least once a year by each Fund. A capital gain occurs if a Fund sells portfolio securities for more than its cost. If you buy Fund shares just before a distribution, in effect, you "buy the distribution." You will pay the full price for the shares and then receive a portion of that price back as a taxable distribution. Dividend and capital gain distributions are automatically reinvested in additional shares of the Fund paying the distribution at the net asset value per share on the distribution date. However, you may request that distributions be automatically reinvested in another Sit Mutual Fund, or paid in cash. These requests may be made on the application, Change of Account Options form, or by written notice to Sit Mutual Funds. You will receive a quarterly statement reflecting the dividend payment and, if applicable, the reinvestment of dividends. If cash payment is requested, an ACH transfer will be initiated, or a check normally will be mailed within five business days after the payable date. If the check cannot be delivered because of an incorrect mailing address, the undelivered distributions and all future distributions will automatically be reinvested in Fund shares. No interest will accrue on uncashed distribution, dividend, or sales proceeds checks. 36 SHAREHOLDER INFORMATION RETIREMENT AND OTHER TAX-DEFERRED ACCOUNTS Taxes on current income can be deferred by investing in Individual Retirement Accounts (IRAs), 401(k), pension, profit sharing, 403(b)(7), employee benefit, deferred compensation and other qualified retirement plans. The Funds are available for your tax-deferred retirement plan with a $2,000 minimum investment per Fund and subsequent contributions of at least $100. Such retirement plans must have a qualified plan sponsor or trustee. Tax-deferred retirement plans include 401(k), profit sharing, and money purchase plans as well as IRA, Roth IRA, SEP-IRA, and certain 403(b)(7) plans. You should contact the Adviser for specific plan documentation. The federal tax laws governing these tax-deferred plans must be complied with to avoid adverse tax consequences. You should consult your tax adviser before investing. TAXES Some of the tax consequences of investing in the Funds are discussed below. More information about taxes is in the Statement of Additional Information. However, because everyone's tax situation is unique, always consult your tax professional about federal, state and local tax consequences. TAXES ON DISTRIBUTIONS Each Fund pays its shareholders distributions from its net investment income and any net capital gains that it has realized. For most investors, these distributions will be taxable, whether paid in cash or reinvested (unless your investment is in an IRA or other tax-advantaged account). Distributions paid from a Fund's net investment income and short-term capital gains, if any, are taxable as ordinary income. Distributions paid from a Fund's long-term capital gains, if any, are taxable as long-term capital gains, regardless of how long you have held your shares. TAXES ON TRANSACTIONS The sale or exchange of your shares in a Fund is a taxable transaction, and you may incur a capital gain or loss on the transaction. If you held the shares for more than one year, this gain or loss would be a long-term gain or loss. A gain or loss on shares held for one year or less is considered short-term and is taxed at the same rates as ordinary income. 37 SHAREHOLDER INFORMATION FOREIGN TAX CREDITS The International Growth Fund and Developing Markets Growth Fund may be required to pay withholding and other taxes imposed by foreign countries. If a Fund has more than 50% of its total assets invested in securities of foreign corporations at the end of its taxable year, it may make an election that will permit you either to claim a foreign tax credit with respect to foreign taxes paid by the Fund or to deduct those amounts as an itemized deduction on your tax return. If a Fund makes this election, you will be notified and provided with sufficient information to calculate the amount you may deduct as foreign taxes paid or your foreign tax credit. MAILING OF REGULATORY DOCUMENTS The Funds' practice is to "household," or consolidate shareholder mailings of regulatory documents such as prospectuses, shareholder reports, and proxies to shareholders at a common address. This means that a single copy of these regulatory documents is sent to the address of record. If at any time you wish to receive multiple copies of the regulatory documents at your address, you may contact the Funds and the Funds will mail separate regulatory documents to each of your individual accounts within 30 days of your call. PRIVACY POLICY We collect nonpublic personal information about you from information we receive from you on applications or other forms and information about your transactions and communications with us, our affiliates or others. We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We restrict access to nonpublic personal information about you to those employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard our nonpublic personal information. 38 ADDITIONAL INFORMATION OTHER SECURITIES, INVESTMENT PRACTICES, AND POLICIES The principal investment strategies and risk factors of each Fund are outlined in the section entitled "Fund Summaries." Below are brief discussions of certain other investment prac tices of the Funds. Each Fund may invest in securities and use investment strategies that are not described in this Prospectus but are described in the Statement of Additional Information. DURATION The Balanced Fund attempts to maintain an average effective duration of 3 to 7 years for the fixed-income portion of its portfolio. Duration measures how much the value of a security is expected to change with a given change in interest rates. Effective duration is one means used to measure interest rate risk. The longer a security's effective duration, the more sensi tive its price to changes in interest rates. For example, if interest rates rise by 1%, the market value of a security with an effective duration of 2 years would decrease by 2%, with all other factors being constant. The Adviser uses several methods to compute duration estimates appropriate for particular securities held in the Balanced Fund's portfolio. Duration estimates are based on assumptions by the Adviser and subject to a number of limitations. Duration is most useful when interest rate changes are small and occur equally in short-term and long-term securities. In addition, it is difficult to calculate duration precisely for bonds with prepayment options, such as mortgage-related securities, because the calculation requires assumptions about prepayment rates. PORTFOLIO TURNOVER The Funds may trade securities frequently, resulting, from time to time, in an annual portfolio turnover rate of over 100%. However, historically the Funds' turnover rates have been less than 100%. The "Financial Highlights" section of this Prospectus shows each Fund's historical portfolio turnover rate. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of com missions or mark-ups to broker-dealers that a Fund pays when it buys and sells securities, which may decrease the Fund's yield. 39 ADDITIONAL INFORMATION SECURITIES RATINGS When debt securities are rated by one or more independent rating agencies, the Adviser uses these ratings to determine bond quality. Investment-grade debt securities are those that are rated within the four highest rating categories, which are AAA, AA, A, and BBB by Standard & Poor's and Fitch, Inc., and Aaa, Aa, A and Baa by Moody's Investor Services. If a debt security's credit quality rating is downgraded after a Fund's purchase, the Adviser will consider whether any action, such as selling the security, is warranted. INVESTMENT IN THE SIT MONEY MARKET FUND Each Fund may invest up to 25% of its total net assets in shares of the money market funds advised by the Adviser, which includes the Sit Money Market Fund, subject to the conditions contained in an exemptive order issued to the Funds by the Securities and Exchange Commis sion. These investments may be made in lieu of direct investments in short-term money market instruments if the Adviser believes that they are in the best interest of the Funds. TEMPORARY DEFENSIVE INVESTING For temporary defensive purposes in periods of unusual market conditions, each Fund may invest all of its total assets in cash or short-term debt securities including certificates of deposit, bankers' acceptances and other bank obligations, corporate and direct U.S. oblig ation bonds, notes, bills, commercial paper and repurchase agreements. As a result, a Fund may not achieve its investment objective. FINANCIAL HIGHLIGHTS The tables that follow present performance information about the shares of each Fund. This information is intended to help you understand each Fund's financial performance for the past five years (or, if shorter, the period of the Fund's operations). Some of this information reflects financial results for a single Fund share. The total returns in the tables represent the rate that you would have earned or lost on an investment in a Fund, assuming you reinvested all of your dividends and distributions. This information has been audited by KPMG LLP, independent auditors, whose report, along with the Funds' financial statements, is included in the Funds' annual report, which is available upon request. 40 ADDITIONAL INFORMATION BALANCED FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE: Beginning of period $ 19.18 $ 17.38 $ 16.68 $ 14.93 $ 12.57 ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Net investment income .46 .40 .32 .34 .33 Net realized and unrealized gains (losses) on investments (3.51) 2.51 1.45 2.99 2.42 ------------------------------------------------------------------------------------------------------------------------ Total from operations (3.05) 2.91 1.77 3.33 2.75 ------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (.48) (.37) (.31) (.35) (.32) From realized gains (.32) (.74) (.76) (1.23) (.07) ------------------------------------------------------------------------------------------------------------------------ Total distributions (.80) (1.11) (1.07) (1.58) (.39) ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE: End of period $ 15.33 $ 19.18 $ 17.38 $ 16.68 $ 14.93 ------------------------------------------------------------------------------------------------------------------------ Total investment return(1) (16.39%) 17.28% 11.25% 23.95% 22.42% ------------------------------------------------------------------------------------------------------------------------ Net assets at end of period (000s omitted) $24,947 $19,304 $12,112 $ 7,422 $ 5,103 RATIOS: Expenses to average daily net assets 1.00% 1.00% 1.00% 1.00% 1.00% Net investment income to average daily net assets 2.89% 2.34% 2.01% 2.20% 2.48% Portfolio turnover rate (excluding short-term securities) 63.32% 68.22% 89.37% 62.62% 38.16% ------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. 41 ADDITIONAL INFORMATION LARGE CAP GROWTH FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: Beginning of period $ 63.66 $ 52.84 $ 49.34 $ 40.39 $ 32.75 ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) (.16) (.18) (.04) .02 .07 Net realized and unrealized gains (losses) on investments (19.48) 14.41 6.96 13.17 10.02 ----------------------------------------------------------------------------------------------------------------------------- Total from operations (19.64) 14.23 6.92 13.19 10.09 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income -- -- (.01) (.07) (.03) From realized gains (5.03) (3.41) (3.41) (4.17) (2.42) ----------------------------------------------------------------------------------------------------------------------------- Total distributions (5.03) (3.41) (3.42) (4.24) (2.45) ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: End of period $ 38.99 $ 63.66 $ 52.84 $ 49.34 $ 40.39 ----------------------------------------------------------------------------------------------------------------------------- Total investment return (1) (32.92%) 27.75% 15.10% 35.33% 32.36% ----------------------------------------------------------------------------------------------------------------------------- Net assets at end of year (000s omitted) $122,829 $172,400 $140,258 $117,496 $ 72,226 RATIOS: Expenses to average daily net assets 1.00% 1.00% 1.00% 1.00% 1.00%(2)) Net investment income (loss) to average daily net assets (0.33%) (0.31%) (0.09%) 0.06% 0.20%(2) Portfolio turnover rate (excluding short-term securities) 45.26% 48.95% 70.51% 43.61% 32.23% -----------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) During the year ended June 30, 1997 the investment adviser voluntarily absorbed $50,548 in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.08% for the year ended June 30, 1997 and the ratio of net investment income (loss) to average daily net assets would have been 0.11%. 42 ADDITIONAL INFORMATION MID CAP GROWTH FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: Beginning of period $ 23.57 $ 14.54 $ 16.49 $ 15.43 $ 15.58 ------------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) (.08) (.12) (.06) (.07) (.03) Net realized and unrealized gains (losses) on investments (7.05) 10.38 .65 3.15 2.50 ------------------------------------------------------------------------------------------------------------------------------- Total from operations (7.13) 10.26 .59 3.08 2.47 ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income -- -- -- -- -- From realized gains (4.07) (1.23) (2.54) (2.02) (2.62) ------------------------------------------------------------------------------------------------------------------------------- Total distributions (4.07) (1.23) (2.54) (2.02) (2.62) ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: End of period $ 12.37 $ 23.57 $ 14.54 $ 16.49 $ 15.43 ------------------------------------------------------------------------------------------------------------------------------- Total investment return (1) (35.21%) 73.01% 6.94% 22.19% 17.23% ------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year (000s omitted) $360,037 $566,639 $375,343 $404,327 $386,543 RATIOS: Expenses to average daily net assets 1.06%(2) 1.00%(2) 1.00%(2) 1.00%(2) 0.92%(2) Net investment income (loss) to average daily net assets (0.49%)(2) (0.58%)(2) (0.46%)(2) (0.41%)(2) (0.20%)(2) Portfolio turnover rate (excluding short-term securities) 56.21% 62.21% 68.62% 52.62% 38.66% -------------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Effective November 1, 1996, total Fund expenses are contractually limited to 1.25% of average daily net assets. However, during the years ended June 30, 2001, 2000, 1999, 1998 and 1997, the investment adviser voluntarily absorbed $904,938, $1,209,620, $865,657, $1,004,074, and $609,840, respectively, in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.25%, 1.25%,1.25%, 1.25% and 1.09% for the years ended June 30, 2001, 2000, 1999, 1998 and 1997, respectively, and the ratio of net investment income (loss) to average daily net assets would have been (0.68%), (0.83%), (0.71%), (0.66%) and (0.37%), respectively. 43 ADDITIONAL INFORMATION INTERNATIONAL GROWTH FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: Beginning of period $ 23.58 $ 18.77 $ 19.14 $ 18.57 $ 16.29 ------------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) (.03) (.04) (.07) .02 .01 Net realized and unrealized gains (losses) on investments (8.42) 6.36 .84 1.25 2.70 ------------------------------------------------------------------------------------------------------------------------------- Total from operations (8.45) 6.32 .77 1.27 2.71 ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income -- (.23) (.06) (.03) (.01) From realized gains (.52) (1.28) (1.08) (.67) (.42) ------------------------------------------------------------------------------------------------------------------------------- Total distributions (.52) (1.51) (1.14) (.70) (.43) ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: End of period $ 14.61 $ 23.58 $ 18.77 $ 19.14 $ 18.57 ------------------------------------------------------------------------------------------------------------------------------- Total investment return (1) (36.43%) 33.38% 4.51% 7.50% 17.04% ------------------------------------------------------------------------------------------------------------------------------- Net assets at end of period (000s omitted) $123,085 $167,909 $ 94,982 $ 99,721 $ 99,279 RATIOS: Expenses to average daily net assets 1.50%(2) 1.50%(2) 1.50%(2) 1.50%(2) 1.50%(2) Net investment income (loss) to average daily net assets (0.20%)(2) (0.40%)(2) (0.37%)(2) 0.12%(2) 0.05%(2)) Portfolio turnover rate (excluding short-term securities) 25.22% 30.61% 45.91% 43.74% 41.59% -------------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Total Fund expenses are contractually limited to 1.85% of average daily net assets. However, during the years ended June 30, 2001, 2000, 1999, 1998 and 1997, the investment adviser voluntarily absorbed $509,023, $467,953, $325,038, $338,651 and $306,575, respectively, in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.85% for the years ended June 30, 2001, 2000, 1999, 1998 and 1997, and the ratio of net investment income (loss) to average daily net assets would have been (0.55%), (0.75%), (0.72%), (0.23%), and 0.30%), respectively. 44 ADDITIONAL INFORMATION SMALL CAP GROWTH FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: Beginning of period $ 41.35 $ 18.28 $ 20.35 $ 18.89 $ 19.27 ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss (.13) (.18) (.18) (.17) (.14) Net realized and unrealized gains (losses) on investments (11.65) 23.25 1.20 2.31 .57 ----------------------------------------------------------------------------------------------------------------------------- Total from operations (11.78) 23.07 1.02 2.14 .43 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From realized gains (.58) -- (3.09) (.68) (.81) ----------------------------------------------------------------------------------------------------------------------------- Total distributions (.58) -- (3.09) (.68) (.81) ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: End of period $ 28.99 $ 41.35 $ 18.28 $ 20.35 $ 18.89 ----------------------------------------------------------------------------------------------------------------------------- Total investment return (1) (28.79%) 126.20% 8.77% 11.70% 2.37% ----------------------------------------------------------------------------------------------------------------------------- Net assets at end of year (000s omitted) $227,888 $190,630 $ 50,335 $ 57,472 $ 58,358 RATIOS: Expenses to average daily net assets 1.50% 1.50% 1.50% 1.50% 1.50% Net income (loss) to average daily net assets (0.41%) (0.83%) (1.08%) (0.72%) (0.81%) Portfolio turnover rate (excluding short-term securities) 39.91% 39.31% 71.84% 79.54% 58.39% -----------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. 45 ADDITIONAL INFORMATION SCIENCE AND TECHNOLOGY GROWTH FUND
Six Months Fiscal Years Ended June 30, Ended June 30, 2001 2000 1999 1998(*) ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: Beginning of period $ 33.38 $ 15.23 $ 11.77 $ 10.00 ---------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income (loss) (.19) (.17) (.07) (.01) Net realized and unrealized gains (losses) on investments (17.10) 18.32 3.53 1.78 ---------------------------------------------------------------------------------------------------------------- Total from operations (17.29) 18.15 3.46 1.77 ---------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income -- -- -- -- From realized gains (.86) -- -- -- ---------------------------------------------------------------------------------------------------------------- Total distributions (.86) -- -- -- ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE: End of period $ 15.23 $ 33.38 $ 15.23 $ 11.77 ---------------------------------------------------------------------------------------------------------------- Total investment return (1) (52.96%) 119.17% 29.40% 17.70% ---------------------------------------------------------------------------------------------------------------- Net assets at end of period (000s omitted) $30,453 $46,173 $14,194 $ 4,858 RATIOS: Expenses to average daily net assets 1.29%(2) 1.25%(2) 1.25%(2) 1.25%(2) Net investment income (loss) to average daily net assets (0.94%)(2) (0.86%)(2) (0.72%)(2) (0.21%)(2) Portfolio turnover rate (excluding short-term securities) 34.59% 29.60% 58.29% 19.37% ----------------------------------------------------------------------------------------------------------------
(*) Commencement of operations was December 31, 1997 (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Percentages for period ended June 30, 1998 are adjusted to an annual rate. Total Fund expenses are contractually limited to 1.50% of average daily net assets. However, during the period ended June 30, 2001, 2000, 1999 and 1998, the investment adviser voluntarily absorbed $86,391, $68,292, $22,008 and $4,655, respectively, in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.50% for the period ended June 30, 2001, 2000, 1999 and 1998, and the ratio of net investment income (loss) to average daily net assets would have been (1.15%), (1.11%), (0.97%) and (0.46%), respectively. 46 ADDITIONAL INFORMATION DEVELOPING MARKETS GROWTH FUND
Fiscal Years Ended June 30, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE: Beginning of period $ 13.43 $ 9.98 $ 9.05 $ 13.04 $ 10.95 ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) -- (.06) -- (.06) .03 Net realized and unrealized gains (losses) on investments (4.26) 3.51 .93 (3.92) 2.06 ------------------------------------------------------------------------------------------------------------------------ Total from operations (4.26) 3.45 .93 (3.98) 2.09 ------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS: From net investment income -- -- -- (.01) -- From realized gains -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------ Total distributions -- -- -- (.01) -- ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE: End of period $ 9.17 $ 13.43 $ 9.98 $ 9.05 $ 13.04 ------------------------------------------------------------------------------------------------------------------------ Total investment return (1) (31.72%) 34.57% 10.28% (30.52%) 19.09% ------------------------------------------------------------------------------------------------------------------------ Net assets at end of year (000s omitted) $13,877 $14,676 $11,338 $11,505 $16,789 RATIOS: Expenses to average daily net assets 2.00% 2.00% 2.00% 2.00% 2.00% Net investment income (loss) to average daily net assets 0.02% (0.55%) (0.05%) (0.52%) 0.32% Portfolio turnover rate (excluding short-term securities) 21.87% 48.39% 98.24% 53.36% 65.88% ------------------------------------------------------------------------------------------------------------------------
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. 47 NOT PART OF PROSPECTUS This Page has been Left Blank Intentionally 48 NOT PART OF PROSPECTUS This Page has been Left Blank Intentionally 49 FOR MORE INFORMATION For more information about the Funds, the following documents are available free upon request: STATEMENT OF ADDITIONAL INFORMATION The SAI contains more details about the Funds and their investment policies. The SAI is incorporated in this Prospectus by reference. ANNUAL/SEMI-ANNUAL REPORT The Funds' Annual and Semi-Annual Reports include a discussion of the market conditions and investment strategies that significantly affected the Funds' performance. To request a copy of the documents listed above, or to obtain more information about the Funds: BY TELEPHONE: (800) 332-5580 or (612) 334-5888 BY E-MAIL: info@sitinvest.com ON THE INTERNET: Visit our website at www.sitfunds.com Visit the SEC website at www.sec.gov BY REGULAR MAIL: Sit Mutual Funds P.O. Box 5166 Westboro, MA 01581-5166 BY EXPRESS MAIL: Sit Mutual Funds 4400 Computer Drive Westboro, MA 01581 TO WIRE MONEY FOR A PURCHASE: Boston Safe Deposit & Trust, Boston, MA ABA #011001234 DDA #056146 Sit Mutual Funds For Further Credit: (shareholder name) Account Number: (shareholder account #) THE SAI AND THE FUNDS' REPORTS MAY ALSO BE REVIEWED AT THE PUBLIC REFERENCE ROOM OF THE SECURITIES AND EXCHANGE COMMISSION IN WASHINGTON, D.C. YOU CAN GET COPIES FREE FROM THE SEC'S WEBSITE LISTED ABOVE, OR BY MAIL, FOR A FEE, BY CALLING THE SEC AT 1-800-SEC-0330 OR BY WRITING THE SEC'S PUBLIC REFERENCE SECTION, 450 FIFTH STREET NW, WASHINGTON, D.C. 20549-6009. [LOGO] SIT MUTUAL FUNDS ---------------- 1940 ACT FILE NOS. 811-03342; 811-03343; 811-06373 PART B STATEMENT OF ADDITIONAL INFORMATION SIT LARGE CAP GROWTH FUND, INC. SIT MID CAP GROWTH FUND, INC. SIT MUTUAL FUNDS, INC, COMPRISED OF: SIT BALANCED FUND SIT SCIENCE AND TECHNOLOGY GROWTH FUND SIT INTERNATIONAL GROWTH FUND SIT SMALL CAP GROWTH FUND SIT DEVELOPING MARKETS GROWTH FUND 90 South Seventh Street, Suite 4600 Minneapolis, Minnesota 55402-4130 www.sitfunds.com; e-mail: info@sitinvest.com 612-334-5888 -- 800-332-5580 This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Funds' Prospectus. The financial statements included as part of the Funds' Annual Report to shareholders for fiscal year ended June 30, 2001 are incorporated by reference into this Statement of Additional Information. Copies of the Funds' Prospectus and/or Annual Report may be obtained from the Funds without charge by contacting the Funds by telephone at (612) 334-5888 or (800) 332-5580 or by mail at 4600 Wells Fargo Center, 90 S.7th Street, Minneapolis, Minnesota 55402-4130, or by visiting the SEC website at www.sec.com. This Statement of Additional Information is dated November 1, 2001, and it is to be used with the Funds' Prospectus dated November 1, 2001. TABLE OF CONTENTS -------------------------------------------------------------------------------- Page ---- FUND BACKGROUND.............................................................. 2 ADDITIONAL INVESTMENT RESTRICTIONS Balanced Fund........................................................... 3 Large Cap Growth Fund and Mid Cap Growth Fund........................... 4 Science and Technology Growth Fund...................................... 5 International Growth Fund............................................... 6 Small Cap Growth Fund................................................... 7 Developing Markets Growth Fund.......................................... 8 COUNTRIES IN WHICH THE INTERNATIONAL GROWTH FUND MIGHT INVEST................ 9 COUNTRIES IN WHICH THE DEVELOPING MARKETS GROWTH FUND MIGHT INVEST........... 11 SPECIAL RISKS FOR INTERNATIONAL GROWTH AND DEVELOPING MARKETS GROWTH FUNDS Corporate Disclosure Standards and Government Regulation................ 12 Market Characteristics.................................................. 12 Currency Fluctuations................................................... 12 Foreign Taxation........................................................ 13 Investment and Repatriation Restrictions................................ 13 ADDITIONAL INVESTMENT POLICIES & RISKS Common and Preferred Stocks............................................. 13 Convertible Securities.................................................. 14 Warrants or Rights...................................................... 14 Commercial Paper........................................................ 14 Obligations of Banks.................................................... 14 Obligations of the U.S. Government...................................... 15 Depository Receipts..................................................... 16 Forward Foreign Currency Exchange Contracts............................. 16 Options - Puts and Calls................................................ 16 When-Issued and Forward Commitment Securities........................... 17 Repurchase Agreements................................................... 17 Futures Contracts and Options on Futures Contracts...................... 18 Illiquid Securities..................................................... 20 Sit Money Market Fund................................................... 20 ADDITIONAL RISKS AND FIXED-INCOME SECURITIES IN WHICH THE BALANCED FUND MAY INVEST Mortgage-Backed Securities.......................................... 20 Asset-Backed Securities............................................. 21 Collaterialized Mortgage Obligations................................ 22 U.S. Treasury Inflation-Protection Securities....................... 22 Manufactured Home Loans............................................. 22 Municipal Securities................................................ 23 Swap Agreements..................................................... 23 Variable Rate Notes................................................. 23 Zero Coupon Securities.............................................. 23 Trust Preferred Securities.......................................... 23 Balanced Fund's Risks of Investing in High Yield Securities......... 24 RATINGS OF DEBT SECURITIES................................................... 24 SECURITIES LENDING........................................................... 25 PORTFOLIO TURNOVER........................................................... 25 ADDITIONAL INFORMATION ABOUT SELLING SHARES Suspension of Selling Ability........................................... 26 Telephone Transactions.................................................. 26 Redemption-In-Kind ..................................................... 26 COMPUTATION OF NET ASSET VALUE............................................... 26 CALCULATION OF PERFORMANCE DATA.............................................. 27 MANAGEMENT................................................................... 29 INVESTMENT ADVISER........................................................... 31 DISTRIBUTOR.................................................................. 34 BROKERAGE.................................................................... 34 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................... 36 TAXES .................................................................... 37 FINANCIAL STATEMENTS......................................................... 39 OTHER INFORMATION............................................................ 39 LIMITATION OF DIRECTOR LIABILITY............................................. 39 CAPITALIZATION AND VOTING RIGHTS............................................. 39 APPENDIX A - BOND AND COMMERCIAL PAPER RATINGS............................... 41 FUND BACKGROUND -------------------------------------------------------------------------------- Sit Mutual Funds are managed by Sit Investment Associates, Inc., (the "Adviser"). Sit Mutual Funds are comprised of twelve 100% no-load funds. This Statement of Additional Information contains the seven stock funds, which are: Balanced Fund, Large Cap Growth Fund, Mid Cap Growth Fund, International Growth Fund, Small Cap Growth Fund, Science and Technology Growth Fund, and the Developing Markets Growth Fund (collectively, the "Funds"). All twelve Funds are open-ended funds, and all Funds (except the Minnesota Tax-Free Income Fund) operate as a diversified management investment companies, as defined in the Investment Company Act of 1940. A "diversified" investment company means a company which meets the following requirements: At least 75% of the value of the company's total assets is represented by cash and cash items (including receivables), "Government Securities", securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of such management company and to not more than 10% of the outstanding voting securities of such issuer. "Government Securities" means securities issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or certificates of deposit for any of the foregoing. Each of the Funds (or the corporate issuer of their shares) is organized as a Minnesota corporation. The Large Cap Growth Fund and Mid Cap Growth Fund were incorporated on July 14, 1981. The corporate issuer of the International Growth 2 Fund, Balanced Fund, Developing Markets Growth Fund, Small Cap Growth Fund, and Science and Technology Growth Fund was incorporated on July 30, 1991. ADDITIONAL INVESTMENT RESTRICTIONS -------------------------------------------------------------------------------- The investment objectives and investment strategies of the Funds are set forth in the Prospectus under "Fund Summaries". Set forth below are the fundamental investment restrictions and policies applicable to each Fund, followed by the non-fundamental investment restrictions and policies. Those restrictions and policies designated as fundamental may not be changed without shareholder approval. Shareholder approval, as defined in the Investment Company Act of 1940, means the lesser of the vote of (a) 67% of the shares of a Fund at a meeting where more than 50% of the outstanding shares of the Fund are present in person or by proxy or (b) more than 50% of the outstanding shares of a Fund. A percentage limitation must be met at the time of investment and a later deviation resulting from a change in values or net assets will not be a violation. Each Fund other than Balanced Fund and International Growth Fund has a policy requiring the Fund, under normal market conditions, to invest at least 80% of its net assets plus the amount of any borrowings for investment purposes in the types of securities suggested by the Fund's name. Each of these Funds has adopted a policy requiring it to provide notice to Fund shareholders at least 60 days prior to any change in its 80% investment policy. Any such notice will be provided in plain English in a separate written document and will contain the following prominent statement, or a similar clear and understandable statement, in bold-faced type: "Important Notice Regarding Change in Investment Policy." This statement will also appear on the envelope in which the notice is delivered unless the notice is delivered separately from other communications to investors. BALANCED FUND -------------------------------------------------------------------------------- The Fund is subject to the following fundamental investment restrictions. The Fund will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase or sell commodities or commodity futures, provided that this restriction does not apply to financial futures contracts or options thereon; 3. Invest in real estate (including real estate limited partnerships), although it may invest in securities which are secured by or represent interests in real estate; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Underwrite the securities of other issuers; 6. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments and not in excess of 33 1/3% of the Fund's total net assets; 7. Invest in exploration or development for oil, gas or other minerals (including mineral leases), although it may invest in the securities of issuers which deal in or sponsor such activities; 8. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 6; or 9. Invest more than 25% of its assets in a single industry except with regard to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. The following investment restrictions of the Fund are not fundamental. The Fund will not: 1. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions and it may make margin deposits in connection with futures contracts; 2. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Fund and/or the Adviser by the Securities and Exchange Commission; 3 3. Purchase or retain securities of any issuer if to the knowledge of the Fund, officers and directors of either the Fund its investment adviser beneficially owning more than 0.5% of such securities together own more than 5% of such securities; 4. Invest more than 10% of its net assets in securities of issuers which, with their predecessors have a record of less than three years continuous operation. Securities of such issuers will not be deemed to fall within this limitation if they are guaranteed by an entity in continuous operation for more than three years; 5. Invest for the purpose of exercising control or management; 6. Enter into reverse repurchase agreements; 7. Invest more than 15% of its net assets collectively in all types of illiquid securities; 8. Invest in more than 10% of the outstanding voting securities of any one issuer; 9. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. This restriction is limited to 75% of the Fund's net assets; 10. Invest more than 5% of the Fund's net assets in warrants (valued at lower of cost or market) including a maximum of 2% which are not listed on the New York or American Stock Exchanges. For this purpose, warrants acquired by the Fund in units or attached to other securities will be deemed to be without value; 11. Pledge, mortgage, hypothecate or otherwise encumber the Fund's assets except to the extent necessary to secure permitted borrowings; 12. Engage in arbitrage transactions or write unsecured put options but may write fully covered call options; 13. Purchase put and call options provided that the aggregate premiums paid for all such options exceed 10% of the Fund's total assets; 14. Invest more than 25% of the fixed-income portion of its portfolio in debt securities that are rated below investment grade; 15. Invest less than 35% or more than 65% of its assets in equity securities and will not invest less than 35% or more than 65% of its assets in fixed-income securities, under normal circumstances; 16. Invest less than 25% of the fixed-income portion of its portfolio in fixed-income senior securities; or 17. Invest more than 20% of its assets in foreign government securities or equity securities of foreign issuers that are either listed on a U.S. or Toronto stock exchange or represented by American Depository Receipts. LARGE CAP GROWTH FUND AND MID CAP GROWTH FUND -------------------------------------------------------------------------------- The Large Cap Growth Fund and Mid Cap Growth Fund are subject to the following fundamental investment restrictions. The Funds will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. This restriction is limited to 75% of the Fund's net assets; 3. Invest more than 10% of the Fund's net assets in securities of companies which have (with their predecessors) a record of less than five years continuous operation; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments and not in excess of 33-1/3% of the Fund's total net assets. 6. Invest more than 5% of the Fund's net assets in warrants (valued at lower of cost or market) including a maximum of 2% which are not listed on the New York or American Stock Exchanges. For this purpose, warrants acquired by the Fund in units or attached to other securities will be deemed to be without value; 7. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions; 8. Concentrate more than 25% of its net assets in any one industry, provided that (i) there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and (ii) utility companies will be classified according to their services, for example, water, gas, electric and communications, and each will be considered a separate industry; 4 9. Purchase or retain the securities of any issuer if, in total, the holdings of all officers and directors of the Fund and of its investment adviser, who individually own beneficially more than 0.5% of such securities, together own more than 5% of such securities; 10. Invest for the purpose of controlling management of any company; 11. Invest in commodities or commodity futures contracts or in real estate, although it may invest in securities which are secured by interests in real estate and in securities of companies which invest or deal in real estate; 12. Invest in exploration or development for oil, gas or other minerals, although it may invest in the securities of issuers which deal in or sponsor such activities; 13. Underwrite the securities of other issuers; 14. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 5; 15. Invest more than 25% of its assets in a single industry except with regard to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; or 16. Invest more than 15% of its net assets collectively in all types of illiquid securities. The following investment restrictions of the Funds are not fundamental and may be changed by the Board of Directors of the Funds. The Funds will not: 1. Engage in arbitrage transactions or write unsecured put options but may write fully covered call options; 2. Purchase put and call options provided that the aggregate premiums paid for all such options exceed 5% of the Fund's net assets; 3. Pledge, mortgage, hypothecate, or otherwise encumber the Fund's assets except to the extent necessary to secure permitted borrowings; 4. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Funds and/or the Adviser by the Securities and Exchange Commission; 5. Pledge, mortgage, hypothecate, or otherwise encumber the Fund's assets except to the extent necessary to secure permitted borrowings; 6. Invest less than 80% of its net assets in common stocks of companies, under normal conditions; or 7. Invest more than 20% of its assets in equity securities of foreign issuers that are either listed on a U.S. or Toronto stock exchange or represented by American Depository Receipts. SCIENCE AND TECHNOLOGY GROWTH FUND -------------------------------------------------------------------------------- The Fund is subject to the following fundamental investment restrictions. The Fund will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase or sell commodities or commodity futures, provided that this restriction does not apply to financial futures contracts or options thereon; 3. Invest in real estate (including real estate limited partnerships), although it may invest in securities that are secured by or represent interests in real estate; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Underwrite the securities of other issuers; 6. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments, and not in excess of 33 1/3% of the Fund's total net assets; 7. Invest in exploration or development for oil, gas or other minerals (including mineral leases), although it may invest in the securities of issuers which deal in or sponsor such activities; 8. Invest more than 25% of its assets in a single industry except with regard to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; or 5 9. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 6. The following investment restrictions of the Fund are not fundamental. The Fund will not: 1. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions and it may make margin deposits in connection with futures contracts; 2. Invest for the purpose of exercising control or management; 3. Invest more than 15% of its net assets collectively in all types of illiquid securities; 4. Invest in more than 10% of the outstanding voting securities of any one issuer; 5. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. This restriction is limited to 75% of the Fund's net assets; 6. Pledge, mortgage, hypothecate or otherwise encumber either Fund's assets except to the extent necessary to secure the permitted borrowings; 7. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Fund and/or the Adviser by the Securities and Exchange Commission; 8. Engage in arbitrage transactions or write unsecured put options but may write fully covered call options; or 9. Purchase put and call options provided that the aggregate premiums paid for all such options exceed 5% of the Fund's net assets; 10. Invest less than 80% of its net assets in common stocks of companies principally engaged in science and technology business activities, under normal conditions; or 11. Invest more than 20% of its assets in equity securities of foreign issuers that are either listed on a U.S. or Toronto stock exchange or represented by American Depository Receipts. INTERNATIONAL GROWTH FUND -------------------------------------------------------------------------------- The Fund is subject to the following fundamental investment restrictions. The Fund will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. This restriction is limited to 75% of the Fund's net assets; 3. Invest more than 5% of the Fund's net assets in securities of companies which have (with their predecessors) a record of less than three years continuous operation; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments and not in excess of 33 1/3% of the Fund's total net assets; 6. Invest more than 5% of the Fund's net assets in warrants (valued at lower of cost or market) including a maximum of 2% which are not listed on the New York Stock Exchange, American Stock Exchange or a recognized foreign exchange. For this purpose, warrants acquired by the Fund in units or attached to other securities will be deemed to be without value; 7. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions; 8. Concentrate more than 25% of its net assets in any one industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; 9. Purchase or retain the securities of any issuer if, to the Fund's knowledge, those holdings of all officers and directors of the Fund or its affiliates, who individually own beneficially more than 0.5% of such securities, together own more than 5% of such securities; 10. Invest for the purpose of controlling management of any company; 6 11. Invest in commodities or commodity futures contracts provided; however, that the entering into of a foreign currency contract shall not be prohibited by this restriction; 12. Invest in real estate or limited partnerships with assets invested in real estate, although the Fund may invest in securities which are secured by interests in real estate and in securities of companies which invest or deal in real estate; 13. Invest in exploration or development for oil, gas or other minerals, although it may invest in the securities of issuers which deal in or sponsor such activities; 17. Invest more than 15% of its net assets collectively in all types of illiquid securities; 18. Underwrite the securities of other issuers; 19. Modify the Fund's investment objective; or 20. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 5. The following investment restrictions of the Fund are not fundamental. The Fund will not: 1. Pledge, mortgage, hypothecate or otherwise encumber the Fund's assets in an amount exceeding the amount of the borrowing secured thereby except to the extent necessary to secure permitted borrowings; or 2. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Fund and/or the Adviser by the Securities and Exchange Commission. Or 3. Invest less than 90% of its net assets in international equity securities, under normal conditions. SMALL CAP GROWTH FUND -------------------------------------------------------------------------------- The Fund is subject to the following fundamental investment restrictions. The Fund will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase or sell commodities or commodity futures, provided that this restriction does not apply to financial futures contracts or options thereon; 3. Invest in real estate (including real estate limited partnerships), although it may invest in securities which are secured by or represent interests in real estate; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Underwrite the securities of other issuers; 6. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments and not in excess of 33 1/3% of the Fund's total net assets; 7. Invest in exploration or development for oil, gas or other minerals (including mineral leases), although it may invest in the securities of issuers which deal in or sponsor such activities; 8. Invest more than 25% of its assets in a single industry except with regard to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; or 9. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 6. The following investment restrictions of the Fund are not fundamental. The Fund will not: 1. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions and it may make margin deposits in connection with futures contracts; 2. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Fund and/or the Adviser by the Securities and Exchange Commission. 7 3. Purchase or retain securities of any issuer if to the knowledge of the Fund, officers and directors of either the Fund or its investment adviser beneficially owning more than 0.5% of such securities together own more than 5% of such securities; 4. Invest more than 10% of its net assets in securities of issuers which, with their predecessors have a record of less than three years continuous operation. Securities of such issuers will not be deemed to fall within this limitation if they are guaranteed by an entity in continuous operation for more than three years; 5. Invest for the purpose of exercising control or management; 6. Enter into reverse repurchase agreements; 7. Invest more than 15% of its net assets collectively in all types of illiquid securities; 8. Invest in more than 10% of the outstanding voting securities of any one issuer; 9. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. This restriction is limited to 75% of the Fund's net assets; 10. Invest more than 5% of the Fund's net assets in warrants (valued at lower of cost or market) including a maximum of 2% which are not listed on the New York or American Stock Exchanges. For this purpose, warrants acquired by the Fund in units or attached to other securities will be deemed to be without value; 11. Pledge, mortgage, hypothecate or otherwise encumber the Fund's assets except to the extent necessary to secure permitted borrowings; 12. Engage in arbitrage transactions or write unsecured put options but may write fully covered call options; 13. Purchase put and call options provided that the aggregate premiums paid for all such options exceed 5% of the Fund's net assets; 14. Invest less than 80% of its net assets in common stocks, under normal conditions; or 15. Invest more than 20% of its assets in equity securities of foreign issuers that are either listed on a U.S. or Toronto stock exchange or represented by American Depository Receipts. DEVELOPING MARKETS GROWTH FUND -------------------------------------------------------------------------------- The Fund is subject to the following restrictions which are fundamental. The Fund will not: 1. Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies or instrumentalities), if as a result, more than 5% of the Fund's net assets would be invested in securities of that issuer. This restriction is limited to 75% of the Fund's net assets; 2. Purchase or sell commodities or commodity contracts, provided that this restriction does not apply to financial futures contracts or options thereon; 3. Invest in real estate (including real estate limited partnerships), although it may invest in securities which are secured by or represent interests in real estate; 4. Make loans except by (a) purchasing publicly distributed debt securities such as bonds, debentures and similar securities in which the Fund may invest consistent with its investment policies, and (b) by lending its portfolio securities to broker-dealers, banks and other institutions in an amount not to exceed 33-1/3% of its total net assets if such loans are secured by collateral equal to 100% of the value of the securities lent; 5. Underwrite the securities of other issuers; 6. Borrow money, except temporarily in emergency or extraordinary situations and then not for the purchase of investments and not in excess of 33 1/3% of the Fund's total net assets; 7. Invest in exploration or development for oil, gas or other minerals (including mineral leases), although it may invest in the securities of issuers which deal in or sponsor such activities; 8. Invest more than 25% of its assets in a single industry except with regard to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; or 9. Issue senior securities as defined in the Investment Company Act of 1940, except for borrowing as permitted in restriction number 6. The following investment restrictions of the Fund are not fundamental and may be changed by the Board of Directors of the Fund. The Fund will not: 1. Purchase on margin or sell short except to obtain short-term credit as may be necessary for the clearance of transactions and it may make margin deposits in connection with futures contracts; 2. Invest more than 5% of the value of its total assets in the securities of any one investment company or more than 10% of the value of its total assets, in the aggregate, in the securities of two or more investment companies, or acquire more 8 than 3% of the total outstanding voting securities of any one investment company, except a.) as part of a merger, consolidation, acquisition, or reorganization or b.) in a manner consistent with the requirements of an exemptive order issued to the Fund and/or the Adviser by the Securities and Exchange Commission; 3. Purchase or retain the securities of any issuer if, to the Fund's knowledge, those holdings of all officers and directors of the Fund or its affiliates, who individually own beneficially more than 0.5% of such securities, together own more than 5% of such securities; 4. Invest more than 5% of its net assets in securities of companies which have (with their predecessors) a record of less than three years' continuous operation; 5. Invest for the purpose of exercising control or management; 6. Invest more than 5% of the Fund's net assets in warrants (valued at lower of cost or market) including a maximum of 2% which are not listed on the New York Stock Exchange, American Stock Exchange or a recognized foreign exchange. For this purpose, warrants acquired by the Fund in units or attached to other securities will be deemed to be without value; 7. Enter into reverse repurchase agreements; 8. Invest more than 15% of its net assets collectively in all types of illiquid securities; 9. Purchase more than 10% of any class of securities of any issuer except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. All debt securities and all preferred stocks are considered as one class. This restriction is limited to 75% of the Fund's net assets; 10. Pledge, mortgage, hypothecate or otherwise encumber the Fund's assets except to the extent necessary to secure permitted borrowings; or 11. Invest less than 80% of its net assets in developing market equity securities, under normal conditions. COUNTRIES IN WHICH THE INTERNATIONAL GROWTH FUND MIGHT INVEST -------------------------------------------------------------------------------- The countries in which the Fund will seek investments include those listed below. The Fund is not obligated and may not invest in all the countries listed; moreover the Fund may invest in countries other than those listed below, when such investments are consistent with the Fund's investment objective and policies. Pacific Basin: Australia Hong Kong Indonesia Japan Malaysia New Zealand -------------- Philippines Singapore South Korea Taiwan Thailand Europe: Austria Belgium Czech Republic Denmark Finland France ------- Germany Greece Hungary + Ireland Italy Luxembourg Netherlands Norway Poland Portugal Spain Sweden Switzerland United Kingdom Other: Argentina Brazil Canada Chile India Mexico ------ Peru Turkey Venezuela Israel
+ Indicates countries in which the Fund effectively may invest primarily through investment funds. Such investments are subject to the provisions of the Investment Company Act of 1940 relating to the purchase of securities of investment companies. See "Additional Investment Restrictions". Under exceptional economic or market conditions abroad, the Fund may temporarily invest all or a major portion of its assets in United States government obligations or high grade debt obligations of companies incorporated in or having their principal activities in the United States. The Fund's management anticipates that, from time to time, the Fund may have more than 25% of its assets invested in securities of companies and concerns domiciled in the countries of Japan, the United Kingdom and/or Germany. These are among the leading industrial economies outside the United States and the values of their stock markets account for a significant portion of the value of international markets. A discussion of the economies of such countries is set forth below. 9 JAPAN. Japan is organized politically as a democratic, parliamentary republic and has a population of approximately 125 million people. The Japanese economy is heavily industrial and export oriented. Although Japan is dependent upon foreign economies for raw materials, Japan's balance of payments in recent years has been strong and positive. Japan has eight stock exchanges located throughout the country, but over 80% of all trading is conducted on the Tokyo Stock Exchange. Prices of stocks listed on the Japanese stock exchange are quoted continuously during regular business hours. Trading commissions are at fixed scale rates which vary by the type and the value of the transaction, but can be negotiable for large transactions. UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND. The United Kingdom of Great Britain and Northern Ireland ("U.K.") is a constitutional monarchy and consists of England, Scotland, Wales and Northern Ireland. The population of the U.K. is approximately 58 million people. Industry in the U.K. is predominantly owned in the private sector. The U.K. has a centralized screen-based trading system located in London, with separate operating facilities located in Belfast, Birmingham, Bristol, Dublin, Glasgow, Liverpool and Manchester. Stock exchange commission rates are negotiable and stock exchange membership is available to limited companies and to nonresidents of the U.K. The Financial Services Act (the "FSA") created a regulatory body known as the Securities and Investments Board (the "SIB"), which has the power to delegate certain of its functions to various "self regulatory organizations", of which the London Stock Exchange is one. Under the FSA structure, the London Stock Exchange is largely self regulating. Stock prices are continuously quoted during business hours of the London Stock Exchange. Trading Commissions in the U.K. are negotiable. THE FEDERAL REPUBLIC OF GERMANY. The Federal Republic of Germany ("Germany") is a federated republic with a population of approximately 81 million people and a democratic parliamentary form of government. The German economy is organized primarily on the basis of private sector ownership, with the state exerting major influence through ownership only in certain sectors, including transportation, communication and energy. Unification of the Federal Republic of Germany with the formerly communist controlled German Democratic Republic took place in 1990. Industrial activity makes the largest contribution to the German gross national product. Although only 5% of German businesses are large scale enterprises, such large scale businesses account for over half of industrial production and employ over half the industrial labor force. Trading volume, therefore, tends to concentrate on relatively few companies with both large capitalizations and broad stock ownership. Historically the German economy has been strongly export oriented. Privatization of formerly state owned enterprise in what was once East Germany is in progress, but will make little difference to the predominance of large scale businesses in overall industrial activity. German equity securities trade predominantly on the country's eight independent local stock exchanges, and the Frankfurt exchange accounts for most of the turnover. Subject to the provisions of pertinent securities law, mainly the Stock Exchange Law of 1896, as amended, the council, management and other executive organs of the stock exchanges constitute self administering and self regulatory bodies. The "Working Group of German Stock Exchanges" headquartered in Frankfurt, of which all eight stock exchanges are members, addresses all policy and administrative questions of national and international character. Prices for active stocks, including those for larger companies, are quoted continuously during stock exchange hours. Less actively traded stocks are quoted only once a day. Equity shares are normally fully paid and nonassessable. Orders for stocks executed for large customers on the stock exchanges are negotiable. A federal stock exchange turnover tax, ranging up to 0.25%, is levied on all securities transactions other than those between banks acting as principal. Nonresidents such as the Fund are charged half these rates. 10 COUNTRIES IN WHICH THE DEVELOPING MARKETS GROWTH FUND MIGHT INVEST -------------------------------------------------------------------------------- The Fund defines "developing markets" as those countries determined by the Sub-Adviser to have developing or emerging markets or economies. Such countries will generally be defined as "emerging stock markets" by the International Finance Corporation, demonstrate low- to middle-income economies according to the International Bank for Reconstruction and Development (the World Bank), or be listed in World Bank publications as developing. Countries currently not considered as having "developing markets" include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The countries in which the Fund may seek to invest include those listed below and, unless otherwise prohibited herein, the countries listed as potential investments for the International Growth Fund as well. The Fund is not obligated and may not invest in all the countries listed; moreover the Fund may invest in countries other than those listed below, when such investments are consistent with the Fund's investment objectives and policies. The Fund will also not seek to diversify investments among geographic regions or levels of economic development in any particular country. Pacific Basin: Bangladesh China Hong Kong India Indonesia Malaysia -------------- Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam + Europe: Czech Rep. Greece Hungary + Poland Portugal Spain ------- Latin America: Argentina Barbados Belize Bolivia Brazil Chile -------------- Colombia Costa Rica Ecuador Jamaica Mexico Panama Paraguay Peru Trinidad & Tobago Uruguay Venezuela Africa: Botswana Egypt Ghana+ Ivory Coast + Kenya + Mauritius + ------- Morocco Namibia + Nigeria South Africa Swaziland + Tunisia Zimbabwe Other: Bermuda Canada Cyprus + Israel Jordan Kuwait + ------ Russia Turkey
+ Indicates countries in which the Fund effectively may invest primarily through investment funds. Such investments are subject to the provisions of the Investment Company Act of 1940 relating to the purchase of securities of investment companies. See "Additional Investment Restrictions". Under exceptional economic or market conditions abroad, the Fund may temporarily invest all or a major portion of its assets in United States government obligations or high grade debt obligations of companies incorporated in or having their principal activities in the United States. The Fund also may invest in certain debt securities issued by the governments of developing market countries that are or may be eligible for conversion into investments in developing market companies under debt conversion programs sponsored by such governments. To the extent such debt securities are convertible to equity securities, they are considered by the Fund to be equity derivative securities. Debt securities (defined as bonds, notes, debentures, commercial paper, certificates of deposit, time deposits and bankers' acceptances) may offer opportunities for long-term capital appreciation. The Fund will only invest in debt securities rated at least C by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's ("S&P") at the time of purchase or, if unrated, of comparable quality as determined by the Adviser or Sub-Adviser. The Fund will not invest more than 5% of its total assets in debt securities rated Baa or lower by Moody's or BBB or lower by S&P at the time of purchase or, if unrated, of comparable quality as determined by the Adviser or Sub-Adviser. Debt securities rated Baa or BBB may have some speculative elements. Debt securities rated C are regarded as having predominantly speculative characteristics. Subject to the above limitations, it is likely that a portion of the debt securities in which the Fund will invest may be unrated. Subsequent to their purchase, particular securities or other investments may cease to be rated or their ratings may be reduced below the minimum rating required 11 for purchase by the Fund. Neither event will require the elimination of an investment from the Fund's portfolio, but the Adviser or Sub-Adviser will consider such an event in its determination of whether the Fund should continue to hold the security. SPECIAL RISKS FOR INTERNATIONAL GROWTH AND DEVELOPING MARKETS GROWTH FUNDS -------------------------------------------------------------------------------- CORPORATE DISCLOSURE STANDARDS AND GOVERNMENT REGULATION -------------------------------------------------------------------------------- Non-U.S. companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. Thus, there may be less available information concerning non-U.S. issuers of securities held by the Funds than is available concerning U.S. companies. MARKET CHARACTERISTICS -------------------------------------------------------------------------------- Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, securities of companies traded in many countries outside the U.S., particularly those of emerging countries, may be subject to further risks due to the inexperience of financial intermediaries, the possibility of permanent or temporary termination of trading and greater spreads between bid and ask prices for securities in such markets. Non-U.S. stock exchanges and brokers are subject to less governmental supervision and regulation than in the U.S. and non-U.S. stock exchange transactions are usually subject to fixed commissions, which are generally higher than negotiated commissions on U.S. transactions. In addition, non-U.S. stock exchange transactions may be subject to difficulties associated with the settlement of such transactions. Such settlement difficulties may result in delays in reinvestment. The Adviser and/or Sub-Adviser, if applicable, will consider such difficulties when determining the allocation of the Funds' assets, although the Funds do not believe that such difficulties will materially adversely affect their portfolio trading activities. Investments in companies domiciled in developing market countries may be subject to potentially higher risks than investments in developed countries. These risks include (i) volatile social, political and economic conditions; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) the existence of national policies which may restrict the Funds' investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vi) the absence, until recently in certain developing market countries, of a capital market structure or market-oriented economy; and (vii) the possibility that recent favorable economic developments in certain developing market countries may be slowed or reversed by unanticipated political or social events in such countries. CURRENCY FLUCTUATIONS -------------------------------------------------------------------------------- The value of the Funds' portfolio securities computed in U.S. dollars will vary with increases and decreases in the exchange rate between the currencies in which the Funds have invested and the U.S. dollar. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the Funds' holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Funds' net asset value and net investment income, and capital gains, if any, to be distributed in U.S. dollars to shareholders by the Funds. The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the price of oil, the pace of activity in the industrial countries, including the United States and other economic and financial conditions affecting the world economy. The Funds endeavor to buy and sell foreign currencies on favorable terms. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Funds change investments from one country to another or when proceeds from the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent the Funds from repatriating invested capital and dividends, withhold portions of interest and dividends at the source, or impose other taxes, with respect to the Funds' investments in securities of issuers of that country. There also is the possibility of expropriation, nationalization, confiscatory or other taxation, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign 12 government securities, political or social instability, or diplomatic developments that could adversely affect investments in securities of issuers in those nations. The Funds may be affected either favorably or unfavorably by fluctuations in the relative rates of exchange between the currencies of different nations, exchange control regulations and indigenous economic and political developments. While transactions in forward currency contracts, options, futures contracts and options on futures contracts (i.e., "hedging positions") may reduce certain risks, such transactions themselves entail certain other risks. Thus, while the Funds may benefit from the use of hedging positions, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for the Funds than if they had not entered into any hedging positions. In the event of an imperfect correlation between a hedging position and portfolio position that is intended to be protected, the desired protection may not be obtained and the Funds may be exposed to risk of financial loss. Perfect correlation between the Funds' hedging positions and portfolio positions may be difficult to achieve because hedging instruments in most developing market countries are not yet available. In addition, it is not possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. FOREIGN TAXATION -------------------------------------------------------------------------------- The Funds' interest and dividend income from foreign issuers may be subject to non-U.S. withholding taxes. The Funds also may be subject to taxes on trading profits in some countries. In addition, many of the countries in the Pacific Basin have a transfer or stamp duties tax on certain securities transactions. The imposition of these taxes will increase the cost to the Fund of investing in any country imposing such taxes. For United States tax purposes, United States shareholders may be entitled to a credit or deduction to the extent of any foreign income taxes paid by the Fund. For additional tax information, please see section entitled, "Taxes" on page 37. INVESTMENT AND REPATRIATION RESTRICTIONS -------------------------------------------------------------------------------- Several of the countries in which the Funds may invest restrict, to varying degrees, foreign investments in their securities markets. Governmental and private restrictions take a variety of forms, including (i) limitations on the amount of funds that may be invested into or repatriated from the country (including limitations on repatriation of investment income and capital gains), (ii) prohibitions or substantial restrictions on foreign investment in certain industries or market sectors, such as defense, energy and transportation, (iii) restrictions (whether contained in the charter of an individual company or mandated by the government) on the percentage of securities of a single issuer which may be owned by a foreign investor, (iv) limitations on the types of securities which a foreign investor may purchase and (v) restrictions on a foreign investor's right to invest in companies whose securities are not publicly traded. In some circumstances, these restrictions may limit or preclude investment in certain countries and the Funds intend to invest only through the purchase of shares of investment funds organized under the laws of such countries. The return on the Funds' investments in investment companies will be reduced by the operating expenses, including investment advisory and administrative fees, of such companies. A Fund's investment in an investment company may require the payment of a premium above the net asset value of the investment company's shares, and the market price of the investment company thereafter may decline without any change in the value of the investment company's assets. The Funds, however, will not invest in any investment company or trust unless it is believed that the potential benefits of such investment are sufficient to warrant the payment of any such premium. ADDITIONAL INVESTMENT POLICIES & RISKS -------------------------------------------------------------------------------- COMMON AND PREFERRED STOCKS -------------------------------------------------------------------------------- Each Fund may invest in common and preferred stocks. Stocks represent shares of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds and before common stocks in its claim on income for dividend payments and on assets should the company be liquidated. After other claims are satisfied, common stockholders participate in company profits on a pro rata basis; profits may be paid out in dividends or reinvested in the company to help it grow. Increases and decreases in earnings are usually reflected in a company's stock price, so common stocks generally have the greatest appreciation and depreciation potential of all corporate securities. 13 CONVERTIBLE SECURITIES -------------------------------------------------------------------------------- Each Fund may invest in debt or preferred stock convertible into or exchangeable for common stock. Traditionally, convertible securities have paid dividends or interest at rates higher than common stocks but lower than non-convertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree. In recent years, convertibles have been developed which combine higher or lower current income with options and other features. WARRANTS OR RIGHTS -------------------------------------------------------------------------------- Each Fund may acquire warrants or rights in connection with other securities or separately. Investments in warrants or rights are limited to 5% of total assets for Large Cap Growth Fund, Balanced Fund, International Growth Fund, Small Cap Growth Fund and Developing Markets Growth Fund. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants (generally two or more years). Warrants or rights acquired in units or attached to securities will be deemed to be without value for purposes of International Growth Fund's and Developing Markets Growth Fund's 5% restriction. COMMERCIAL PAPER -------------------------------------------------------------------------------- Short-term debt instruments purchased by the Funds consist of commercial paper (including variable amount master demand notes), which refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness of the notes. The commercial paper purchased by the Funds will consist only of direct obligations which, at the time of purchase, are (a) rated P-1 by Moody's or A-1 by S& P, or (b) if not rated, issued by companies having an outstanding unsecured debt issue which at the time of purchase is rated Aa or higher by Moody's or AA or higher by S&P. OBLIGATIONS OF BANKS -------------------------------------------------------------------------------- Bank money instruments in which the Funds may invest include certificates of deposit, including variable rate certificates of deposit, bankers' acceptances and time deposits. "Bank" includes commercial banks, savings banks and savings and loan associations. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market rate, which is tied to the then prevailing certificate of deposit rate, with some premium paid because of the longer final maturity date of the variable rate certificate of deposit. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Variable rate certificates of deposit normally carry a higher interest rate than fixed rate certificates of deposit with shorter maturities, because the bank issuing the variable rate certificate of deposit pays the investor a premium as the bank has the use of the investor's money for a longer period of time. Variable rate certificates of deposit can be sold in the secondary market. In addition, frequently banks or dealers sell variable rate certificates of deposit and simultaneously agree, either formally or informally, to repurchase such certificates, at the option of the purchaser of the certificate, at par on the coupon dates. In connection with the Fund's purchase of variable rate certifies of deposit, it may enter into formal or informal agreements with banks or dealers allowing the Fund to resell the certificates to the bank or dealer, at the Fund's option. If the agreement to repurchase is informal, there can be no assurance that the Fund would always be able to resell such certificates. Before entering into any such transactions governed by formal agreements, however, the Fund will comply with the provisions of SEC Release 10666 which generally provides that the repurchase agreement must be fully collateralized. With respect to variable rate certificates of deposit maturing in 180 days or less from the time of purchase with interest rates adjusted on a monthly cycle, the Balanced Fund uses the period remaining until the next rate adjustment date for purposes of determining the average weighted maturity of the fixed income portion of its portfolio. With respect to all variable rate instruments not meeting the foregoing criteria, the Balanced Fund uses the remaining period to maturity for purposes of determining the average weighted maturity of the fixed income portion of its portfolio until such time as the Securities and Exchange Commission has determined otherwise. 14 A banker's acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. Both domestic banks and foreign branches of domestic banks are subject to extensive, but different, governmental regulations which may limit both the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing short-term debt conditions. General economic conditions, as well as exposure to credit losses arising from possible financial difficulties of borrowers, also play an important part in the operations of the banking industry. As a result of federal and state laws and regulations, domestic banks are, among other things, generally required to maintain specified levels of reserves, limited in the amount which they can loan to a single borrower, and are subject to other regulations designed to promote financial soundness. Since each Fund's portfolio may contain securities of foreign banks and foreign branches of domestic banks, the Funds may be subject to additional investment risks that are different in some respects from those incurred by a fund that invests only in debt obligations of domestic banks. The Funds only purchase certificates of deposit from savings and loan institutions which are members of the Federal Home Loan Bank and are insured by the Federal Savings and Loan Insurance Corporation. Such savings and loan associations are subject to regulation and examination. Unlike most savings accounts, certificates of deposit held by the Funds do not benefit materially from insurance either from the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. Certificates of deposit of foreign branches of domestic banks are not covered by such insurance and certificates of deposit of domestic banks purchased by the Funds are generally in applicable denominations far in excess of the dollar limitations on insurance coverage. INTERNATIONAL BANK OBLIGATIONS. For the purposes of the Developing Markets Growth Fund's and International Growth Fund's investment policies with respect to bank obligations, obligations of foreign branches of U.S. banks and of foreign banks may be obligations of the parent bank in addition to the issuing bank, or may be limited by the terms of a specific obligation and by government regulation. As with investment in non-U.S. securities in general, investments in the obligations of foreign branches of U.S. banks and of foreign banks may subject the Funds to investment risks that are different in some respects from those of investments in obligations of domestic issuers. Although the Funds will typically acquire obligations issued and supported by the credit of U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion, this $1 billion figure is not a fundamental investment policy or restriction of the Funds. For the purposes of calculation with respect to the $1 billion figure, the assets of a bank will be deemed to include the assets of its U.S. and non-U.S. branches. OBLIGATIONS OF, OR GUARANTEED BY, THE UNITED STATES GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES -------------------------------------------------------------------------------- Each Fund may invest in obligations of the U.S. government, its agencies or instrumentalities. Securities issued or guaranteed by the United States include a variety of Treasury securities, which differ only in their interest rates, maturities and dates of issuance. Treasury bills have a maturity of one year or less. Treasury notes have maturities of one to ten years and Treasury bonds generally have maturities of greater than ten years at the date of issuance. Securities issued and/or guaranteed by agencies of the U.S. government and various instrumentalities which have been established or sponsored by the U.S. government may or may not be backed by the "full faith and credit" of the United States. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. Some of the government agencies which issue or guarantee securities are the Department of Housing and Urban Development, the Department of Health and Human Services, the Government National Mortgage Association, the Farmers Home Administration, the Department of Transportation, the Department of Defense and the Department of Commerce. Instrumentalities which issue or guarantee securities include the Export-Import Bank, the Federal Farm Credit System, 15 Federal Land Banks, the Federal Intermediate Credit Bank, the Bank for Cooperatives, Federal Home Loan Banks, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. DEPOSITORY RECEIPTS -------------------------------------------------------------------------------- The Funds may hold securities of foreign issuers in the form of sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Government Depository Receipts ("GDRs") and other similar global instruments available in developing markets, or other securities convertible into securities of eligible issuers. These securities may not necessarily be denominated in the same currency as the securities for which they may be exchanged. Generally, ADRs in registered form are designed for use in United States securities markets, and EDRs and other similar global instruments in bearer form are designed for use in European securities markets. For purposes of each Fund's investment policies, the Fund's investment in ADRs, EDRs, and similar instruments will be deemed to be investments in the equity securities representing securities of foreign issuers into which they may be converted. Unsponsored ADRs are offered by companies which are not prepared to meet either the reporting or accounting standards of the U.S. While readily exchangeable with stock in local markets, unsponsored ADRs may be less liquid than sponsored ADRs. Additionally, there generally is less publicly available information with respect to unsponsored ADRs. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -------------------------------------------------------------------------------- The Balanced Fund, Developing Markets Growth Fund and International Growth Fund may enter into forward currency contracts to attempt to minimize the risk to the Funds from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward currency contract is an obligation to purchase or sell a specific currency for an agreed upon price at a future date which is individually negotiated and privately traded by currency traders and their customers. A Fund may enter into a forward currency contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency or is expecting a dividend or interest payment in order to "lock in" the U.S. dollar price of the security or dividend or interest payment. In addition, when the Sub-Adviser believes that a foreign currency or currencies may suffer a substantial decline against the U.S. dollar, the Fund may enter into a forward currency contract to sell an amount of a foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency or related currencies that the Sub-Adviser feels demonstrate correlation in exchange rate movements (such a practice is called "crosshedging"), or when the Sub-Adviser believes that the U.S. dollar may suffer a substantial decline against a foreign currency or currencies, the Fund may enter into a forward contract to buy a foreign currency for a fixed dollar amount. In connection with each Fund's forward contract transactions, an amount of the Fund's assets equal to the amount of the Fund's commitment will be held aside or segregated to be used to pay for the commitment. Accordingly, the Funds will always have cash, cash equivalents or high quality debt securities denominated in the appropriate currency available in an amount sufficient to cover any commitments under these contracts. Segregated assets used to cover forward currency contracts will be marked to market on a daily basis. While these contracts are not presently regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future regulate forward currency contracts. In such event, the Funds' ability to utilize forward currency contracts in the manner set forth above may be restricted. Forward currency contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance by the Funds than if they had not engaged in such contracts. The Funds will generally not enter into forward foreign currency exchange contract with terms greater than one year. OPTIONS - PUTS AND CALLS -------------------------------------------------------------------------------- Large Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Science and Technology Growth Fund, Balanced Fund and International Growth Fund may write exchange-traded call options on securities and may purchase and sell exchange-traded put and call options on securities written by others, or combinations or such options. All call options written by such Funds must be fully covered. Such Funds may not write put options. The aggregate cost of all outstanding options purchased and held by a Fund will at no time exceed 5% of the Fund's total assets. Developing Markets Growth Fund may write covered put and call options and purchase put and call options on securities or securities indices that are traded on United States and foreign exchanges or in the over-the-counter markets. The value of the underlying securities on which options may be written at any one time will not exceed 15% of the total assets of Developing Markets Growth Fund. In addition, the Fund will not purchase put or call options if the aggregate premium paid for such options would exceed 5% of its total assets at the time of purchase. 16 An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option. A Fund may write a call or, in the case of Developing Markets Growth Fund, a put option to generate income, and will do so only if the option is "covered." This means that so long as a Fund is obligated as the writer of a call option, it will own the underlying securities subject to the call, or hold a call at the same or lower exercise price, for the same exercise period, and on the same securities as the written call. A put is covered if a Fund maintains liquid assets with value at least equal to the exercise price in a segregated account, or holds a put on the same underlying securities at an equal or greater exercise price. By writing a call option, a Fund might lose the potential for gain on the underlying security while the option is open, and by writing a put option a Fund might become obligated to purchase the underlying security for more than its current market price upon exercise. If a Fund purchases a put or call option, any loss to the Fund is limited to the premium paid for, and transaction costs paid in connection with, the option. The use of options also involves the risk of limited liquidity in the even that a Fund seeks to close out an options position before expiration by entering into an offsetting transaction. WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -------------------------------------------------------------------------------- The Funds may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. When such transactions are negotiated, the price is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date, which can be a month or more after the date of the transaction. The Funds will not accrue income on securities purchased on a forward commitment basis prior to their stated delivery date. At the time the Funds make the commitment to purchase securities on a when-issued or forward commitment basis, they will record the transaction and thereafter reflect the value of such securities in determining their net asset value. At the time the a Fund enters into a transaction on a when-issued or forward commitment basis, a segregated account consisting of cash and liquid securities equal to the value of the when-issued or forward commitment securities will be established and maintained with the custodian and will be marked to the market daily. On the delivery date, the Fund will meet its obligations from securities that are then maturing or sales of the securities held in the segregated asset account and/or from then available cash flow. If a Fund disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss due to market fluctuation. There is always a risk that the securities may not be delivered and that the Fund may incur a loss or will have lost the opportunity to invest the amount set aside for such transaction in the segregated asset account. Settlements in the ordinary course of business, which may take substantially more than five business days for non-U.S. securities, are not treated by the Funds as when-issued or forward commitment transactions and, accordingly, are not subject to the foregoing limitations even though some of the risks described above may be present in such transactions. REPURCHASE AGREEMENTS -------------------------------------------------------------------------------- Each Fund is permitted to invest in repurchase agreements. A repurchase agreement is a contract by which the Fund acquires the security ("collateral") subject to the obligation of the seller to repurchase the security at a fixed price and date (within seven days). A repurchase agreement may be construed as a loan pursuant to the 1940 Act. Each Fund may enter into repurchase agreements with respect to any securities which it may acquire consistent with its investment policies and restrictions. The Funds' custodian will hold the securities underlying any repurchase agreement in a segregated account. In investing in repurchase agreements, a Fund's risk is limited to the ability of the seller to pay the agreed-upon price at the maturity of the repurchase agreement. In the opinion of the Adviser, such risk is not material, since in the event of default, barring extraordinary circumstances, the Fund would be entitled to sell the underlying securities or otherwise receive adequate protection under federal bankruptcy laws for its interest in such securities. However, to the extent that proceeds from any sale upon a default are less than the repurchase price, the Funds could suffer a loss. In addition, a Fund may incur certain delays in obtaining direct ownership of the collateral. The Adviser will continually monitor the value of the underlying securities to ensure that their value always equals or exceeds the repurchase price. The Adviser will submit a list of recommended issuers of repurchase agreements and other short-term securities that it has reviewed for credit worthiness to the Funds' directors at least quarterly for their approval. 17 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -------------------------------------------------------------------------------- Balanced Fund, Science and Technology Growth Fund, Small Cap Growth Fund, and Developing Markets Growth Fund may invest in futures contracts and options on futures contracts for the purpose of hedging (and not for speculative purposes). As a result of entering into futures contracts, no more than 5% of a Fund's net assets may be committed to margin. Each such Fund may enter into interest rate futures, interest rate index futures and options thereon. In addition, International Growth Fund may enter into foreign currency contracts. DESCRIPTION OF FUTURES CONTRACTS. A futures contract sale creates an obligation by a Fund, as seller, to deliver the type of financial instrument called for in the contract at a specified future time for a stated price. A futures contract purchase creates an obligation by the Fund, as purchaser, to take delivery of the underlying financial instrument at a specified future time for a stated price. Although futures contracts by their terms call for actual delivery or acceptance of the underlying financial instrument, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out a futures contract sale is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price of the initial sale of the futures contract exceeds the price of the offsetting purchase, the Fund is paid the difference and realizes a gain. If the price of the offsetting purchase exceeds the price of the initial sale, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the Fund entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. The Fund is required to maintain margin deposits with brokerage firms through which it enters into futures contracts. Margin balances will be adjusted at least weekly to reflect unrealized gains and losses on open contracts. In addition, the Fund will pay a commission on each contract, including offsetting transactions. Futures contracts are traded only on commodity exchanges--known as "contract markets"--approved for such trading by the Commodity Futures Trading Commission ("CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market. The CFTC regulates trading activity on the exchanges pursuant to the Commodity Exchange Act. The principal exchanges are the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. The staff of the CFTC has indicated that an entity such as the Fund would not be a "pool" if it traded commodity futures contracts solely for hedging purposes and not for speculation. Furthermore, the Fund is restricted to no more than 5% of its net assets being committed to margin on futures contracts and premiums for options on futures contracts, and therefore will not operate as a "pool" as that term is defined by the CFTC. The Funds may use futures solely to hedge against anticipated interest rate, market or currency movements and not for speculation. The Funds presently could accomplish similar results to that which they hope to achieve through the use of futures contracts by purchasing or selling securities or currencies. For example, Balanced Fund could sell debt securities with long maturities and invest in debt securities with short maturities when interest rates are expected to increase, or conversely, sell short-term debt securities and invest in long-term debt securities when interest rates are expected to decline. However, because of the liquidity that is often available in the futures market, such protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest being earned by the Funds, through using futures contracts. DESCRIPTION OF OPTIONS ON FUTURES CONTRACTS. The Funds may purchase put and call options on futures contracts as a hedge against interest rate, market or currency movements, and will enter into closing transactions with respect to such options to terminate existing positions. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time prior to the expiration dates of the option. 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. 18 RISKS OF FUTURES CONTRACTS. One risk in employing futures contracts to protect against cash market price volatility is the prospect that futures prices will correlate imperfectly with the behavior of cash prices. The ordinary spreads between prices in the cash and futures markets, due to differences in the natures of those markets, are subject to distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions that could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of market trends by the Adviser or Sub-Adviser may still not result in a successful transaction. Another risk is that the Adviser or Sub-Adviser would be incorrect in its expectation as to the extent of various interest rate movements (anticipated securities prices and foreign currency exchange rates for the Developing Markets Growth Fund and International Growth Fund) or the time span within which the movements take place and other economic factors. Closing out an interest rate futures contract purchase at a loss because of higher interest rates will generally have one or two consequences depending on whether, at the time of closing out, the "yield curve" is normal (long-term rates exceeding short-term). If the yield curve is normal, it is possible that the Fund will still be engaged in a program of buying long-term securities. Thus, closing out the futures contract purchase at a loss will reduce the benefit of the reduced price of the securities purchased. If the yield curve is inverted, it is possible that the Fund will retain its investments in short-term securities earmarked for purchase of longer term securities. Thus, closing out of a loss will reduce the benefit of the incremental income that the Fund will experience by virtue of the high short-term rates. Although futures contracts are traded only on commodity exchanges, there can be no assurance that a liquid secondary market will exist for any particular future, and theoretically losses from investing in futures transactions are potentially unlimited. RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures contracts also involves additional risk. Compared to the purchase or sale of futures contracts, the purchase of options on futures contracts involves less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). The effective use of options strategies is dependent, among other things, upon the Fund's ability to terminate options positions at a time when the Adviser or Sub-Adviser deems it desirable to do so. Although the Fund will enter into an option position only if the Adviser or Sub-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. The Fund's transactions involving options on futures contracts will be conducted only on recognized exchanges. Although the Funds will generally purchase only those options for which there appears to be an active secondary market, there can be no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time. For some options no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Funds would have to exercise its options in order to realize any profit and would incur transaction costs upon the purchase or sale of underlying securities or currencies. Secondary markets on an exchange may not exist or may not be liquid for a variety of reasons including: (i) insufficient trading interest in certain options; (ii) restrictions on opening transactions or closing transactions imposed by an exchange; (iii) trading halts, suspension or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances which interrupt normal operations on an exchange; (v) inadequate facilities of an exchange or the Options Clearing Corporation to handle current trading volume at all times; or (vi) discontinuance in the future by one or more exchanges for economic or other reasons, of trading of options (or of a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. 19 ILLIQUID SECURITIES -------------------------------------------------------------------------------- Each Fund may invest up to 15% of its net assets in all forms of "illiquid securities." An investment is generally deemed to be "illiquid" if it cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which such securities are valued by the Fund. Restricted securities are securities which were originally sold in private placements and which have not been registered under the Securities Act of 1933 (the "1933 Act"). Such securities generally have been considered illiquid by the staff of the Securities and Exchange Commission (the "SEC"), since such securities may be resold only subject to statutory restrictions and delays or if registered under the 1933 Act. However, the SEC has recently acknowledged that a market exists for certain restricted securities (for example, securities qualifying for resale to certain "qualified institutional buyers" pursuant to Rule 144A under the 1933 Act). Additionally, a similar market exists for commercial paper issued pursuant to the private placement exemption of Section 4(2) of the 1933 Act. As a fundamental policy, the Funds may invest without limitation in these forms of restricted securities if such securities are determined by the Adviser or Sub-Adviser to be liquid in accordance with standards established by the Funds' Board of Directors. Under these standards, the Adviser or Sub-Adviser must consider (a) the frequency of trades and quotes for the security, (b) the number of dealers willing to purchase or sell the security and the number of other potential purchasers, (c) dealer undertakings to make a market in the security, and (d) the nature of the security and the nature of the marketplace trades (for example, the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). At the present time, it is not possible to predict with accuracy how the markets for certain restricted securities will develop. Investing in restricted securities could have the effect of increasing the level of a Fund's illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing these securities. SIT MONEY MARKET FUND -------------------------------------------------------------------------------- The Funds may invest up to 25% of their total net assets in shares of money market funds advised by the Adviser, which includes the Money Market Fund, subject to the conditions contained in an exemptive order (the "Exemptive Order") issued to the Funds and the Adviser by the Securities and Exchange Commission. Such investments may be made in lieu of direct investments in short term money market instruments if the Adviser believes that they are in the best interest of the Funds. The Exemptive Order requires the Adviser and its affiliates, in their capacities as service providers for the Money Market Fund, to remit to the Funds, or waive, an amount equal to all fees otherwise due to them under their advisory and other agreements with the Money Market Fund to the extent such fees are based upon a Fund's assets invested in shares of the Money Market Fund. This requirement is intended to prevent shareholders of the Funds from being subjected to double management and other asset-based fees as a result of a Fund's investments in the Money Market Fund. ADDITIONAL RISKS AND FIXED-INCOME SECURITIES IN WHICH THE BALANCED FUND MAY INVEST -------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES -------------------------------------------------------------------------------- The mortgage-backed securities in which the Balanced Fund may invest provide funds for mortgage loans made to residential home buyers. These include securities that represent interests in pools of mortgage loans made by lenders such as savings and loan institutions, mortgage banks, commercial banks and insurance companies. Pools of mortgage loans are assembled for sale to investors such as the Fund by various private, governmental and government-related organizations. Interests in pools of mortgage-backed securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Mortgage-backed securities provide monthly payments which consist of both interest and principal payments to the investor. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid to the issuer, servicer, or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-backed securities, i.e., GNMA's, are described as "modified pass-through." These securities entitle the holders to receive all interest and principal payments owed on the mortgages in the pool, net of certain fees, regardless of whether or not the mortgagors actually make the payments. 20 The principal government guarantor of mortgage-backed securities is the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. GNMA is authorized to issue mortgage pass-through securities and guarantee, with the full faith and credit of the U.S. government, the timely payment of principal and interest on loans originated by approved institutions and backed by pools of FHA-insured or VA-guaranteed mortgages. The Federal Home Loan Mortgage Corporation ("FHLMC") also pools mortgage loans and issues pass-through securities. FHLMC is a corporate instrumentality of the U.S. government and was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. Its stock is owned by the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates ("PC's") which represent interest in mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal; however, PC's are not backed by the full faith and credit of the U.S. government. The Federal National Mortgage Association ("FNMA") is a government sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved seller/services which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage banks. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. government. The Federal Housing Administration ("FHA") was established by Congress in 1934 under the National Housing Act. A major purpose of the Act was to encourage the flow of private capital into residential financing on a protected basis. FHA is authorized to insure mortgage loans, primarily those related to residential housing. FHA does not make loans and does not plan or build housing. FHA Project Pools are pass-through securities representing undivided interests in pools of FHA-insured multi-family project mortgage loans. The Fund may purchase securities which are insured but not issued or guaranteed by the U.S. government, its agencies or instrumentalities. An example of such a security is a housing revenue bond (the interest on which is subject to federal taxation) issued by a state and insured by an FHA mortgage loan. The Fund has not purchased this type of security and has no current intent to do so. This type of mortgage is insured by FHA pursuant to the provisions of Section 221(d)(4) of the National Housing Act of 1934, as amended. After a mortgagee files a claim for insurance benefits, FHA will pay insurance benefits up to 100% of the unpaid principal amount of the mortgage (generally 70% of the amount is paid within six months of the claim and the remainder within the next six months). The risks associated with this type of security are the same as other mortgage securities -- prepayment and/or redemption prior to maturity, loss of premium (if paid) if the security is redeemed prior to maturity and fluctuation in principal value due to an increase or decrease in interest rates. The average life of pass-through pools varies with the maturities of the underlying mortgage instruments. In addition, the pool's term may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayment is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. As prepayment rates of individual pools vary widely, it is not possible to accurately predict the average life of a particular pool. Mortgage pass-through securities which receive regular principal payments have an average life less than their maturity. The average life of mortgage pass-through investments will typically vary from 1 to 18 years. Yields on pass-through mortgage-backed securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the assumed average life yield. The compounding effect from reinvestments of monthly payments received by the Fund will increase the yield to shareholders. ASSET-BACKED SECURITIES -------------------------------------------------------------------------------- The Balanced Fund may invest in asset-backed securities that are backed by consumer credit such as automobile receivables, consumer credit card receivables, and home equity loans. Asset-backed securities are generally privately issued and, similar 21 to mortgage-backed securities, pass through cash flows to investors. Generally, asset-backed securities include many of the risks associated with mortgage-related securities. In general, however, the collateral supporting asset-backed securities is of shorter maturity than mortgage loans. In addition, prepayments are less sensitive to changes in interest rates than mortgage pass-throughs. Asset-backed securities involve certain risks that are not posed by mortgage-backed securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, including the bankruptcy laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds for repossessed collateral may not always be sufficient to support payments on these securities. COLLATERIALIZED MORTGAGE OBLIGATIONS (CMOS) -------------------------------------------------------------------------------- The Balanced Fund may invest in CMOs. CMOs are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Similar to a bond, interest and principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. Since CMOs derive their return from underlying mortgages, they are commonly referred to as derivative securities, but are not subject to Balanced Fund's 10% limitation on investments in derivative instruments discussed above under "Swap Agreements." CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class; investors holding the longer maturity classes receive principal only after the earlier classes have been retired. CMOs that are issued or guaranteed by the U.S. Government or by any of its agencies or instrumentalities will be considered U.S. Government securities by the Balanced Fund, while other CMOs, even if collateralized by U.S. Government securities, will have the same status as other privately issued securities for purposes of applying the Fund's diversification tests. U.S. TREASURY INFLATION-PROTECTION SECURITIES -------------------------------------------------------------------------------- U.S. Treasury inflation-protection securities are a type of U.S. government obligation. The Balanced Fund may invest in inflation-protection securities, which are marketable book-entry securities issued by the United States Department of Treasury ("Treasury") with a nominal return linked to the inflation rate in prices. The index used to measure inflation is the non-seasonably adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers ("CPI-U"). The principal value of an inflation-protection security is adjusted for inflation, and every six months the security pays interest, which is an amount equal to a fixed percentage of the inflation-adjusted value of the principal. The final payment of principal of the security will not be less than the original par amount of the security at issuance. The principal of an inflation-protection security is indexed to the non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal value for a particular valuation date, the value of the principal at issuance is multiplied by the index ratio applicable to that valuation date. The index ratio for any date is the ratio of the reference CPI applicable to such date to the reference CPI applicable to the original issue date. Semiannual coupon interest is determined by multiplying the inflation-adjusted principal amount by one-half of the stated rate of interest on each interest payment date. Inflation-adjusted principal or the original par amount, whichever is larger, is paid on the maturity date as specified in the applicable offering announcement. If at maturity the inflation-adjusted principal is less than the original principal value of the security, an additional amount is paid at maturity so that the additional amount plus the inflation-adjusted principal equals the original principal amount. Some inflation-protection securities may be stripped into principal and interest components. In the case of a stripped security, the holder of the stripped principal would receive this additional amount. The final interest payment, however, will be based on the final inflation-adjusted principal value, not the original par amount. MANUFACTURED HOME LOANS -------------------------------------------------------------------------------- The Balanced Fund invests in GNMA manufactured home loan pass-through securities. Manufactured home loans are fixed-rate loans secured by a manufactured home unit. In certain instances the loan may be collateralized by a combination of a manufactured home unit and a developed lot of land upon which the unit can be placed. Manufactured home loans are generally not mortgages; however, because of the structural and operational similarities with mortgage backed pass-through securities and the role of GNMA, industry practice often groups the securities within the spectrum of GNMA mortgage backed pass-through securities for listing purposes. Manufactured home loans have key characteristics 22 different from mortgage backed securities including different prepayment rates. Prepayment rates tend to fluctuate with interest rates and other economic variables. Manufactured home loan prepayment rates generally tend to be less volatile than the prepayment rates experienced by mortgage backed securities. See the above discussion regarding mortgage backed securities. MUNICIPAL SECURITIES -------------------------------------------------------------------------------- Municipal securities in which the Balanced Fund may invest include securities that are issued by states, territories and possessions of the United States and the District of Columbia and their agencies, instrumentalities and political subdivisions. The yields on municipal securities are dependent on a variety of factors, including the general level of interest rates, the financial condition of the issuer, general conditions of the tax-exempt securities market, the size of the issue, the maturity of the obligation and the rating of the issue. Ratings are general, and not absolute, standards of quality. Consequently, securities of the same maturity, interest rate and rating may have different yields, while securities of the same maturity and interest rate with different ratings may have the same yield. SWAP AGREEMENTS -------------------------------------------------------------------------------- Swap agreements are two party contracts entered into primarily by institutional investors in which two parties agree to exchange the returns (or differential rates of return) earned or realized on particular predetermined investments or instruments. The Balanced Fund may enter into swap agreements for purposes of attempting to obtain a particular investment return at a lower cost to the Funds than if the Funds had invested directly in an instrument that provided that desired return. The Fund bears the risk of default by its swap counterpart and may not be able to terminate its obligations under the agreement when it is most advantageous to do so. In addition, certain tax aspects of swap agreements are not entirely clear and their use, therefore, may be limited by the requirements relating to the qualification of a Fund as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). The Balanced Fund may invest up to 10% of its assets in certain derivative instruments, including futures, options, options on futures, and enter into swap agreements. VARIABLE RATE NOTES -------------------------------------------------------------------------------- The Balanced Fund may purchase floating and variable rate notes. The interest rate is adjusted either at predesignated periodic intervals (variable rate) or when there is a change in the index rate on which the interest rate on the obligation is based (floating rate). These notes normally have a demand feature which permits the holder to demand payment of principal plus accrued interest upon a specified number of days' notice. The issuer of floating and variable rate demand notes normally has a corresponding right, after a given period, to prepay at its discretion the outstanding principal amount of the note plus accrued interest upon a specified number of days' notice to the noteholders. ZERO COUPON SECURITIES -------------------------------------------------------------------------------- The Balanced Fund is permitted to invest in zero coupon securities. Such securities are debt obligations which do not entitle the holder to periodic interest payments prior to maturity and are issued and traded at a discount from their face amounts. The discount varies depending on the time remaining until maturity, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity of the security approaches. The market prices of zero coupon securities are more volatile than the market prices of securities of comparable quality and similar maturity that pay interest periodically and may respond to a greater degree to fluctuations in interest rates than do such non-zero coupon securities. TRUST PREFERRED SECURITIES -------------------------------------------------------------------------------- The Balanced Fund may purchase trust preferred securities issued primarily by financial institutions such as banks and insurance companies. Trust preferred securities purchased by the Fund generally have a stated par value, a stated maturity typically of 30 years, are callable after a set time period of typically five or ten years and pay interest quarterly or semi-annually. The proceeds from the issuance of the securities are placed in a single asset trust controlled by the issuer holding company, and the trust in-turn purchases long-term junior subordinated debt of the issuer holding company. The junior subordinated debt held by the trust is senior to all common and preferred stock of the issuer. The junior subordinated debt instruments include deferral provisions whereby the issuer holding company may defer interest 23 payments for up to five years under certain circumstances, provided that no dividend payments are made with respect to outstanding common and preferred stock, and during a period of interest deferral the securities earn compounded interest which is accrued by the issuer as an interest expense. The Federal Reserve Bank limits the amount of trust preferred securities that an issuer may have outstanding such that the total of cumulative preferred stock and trust preferred securities outstanding may not exceed 25 percent of the issuer's Tier 1 capital base. The securities provide that they are immediately callable in the event of a change in the tax law whereby the interest paid by the issuer is no longer treated as an interest expense deduction by the issuer. BALANCED FUND'S RISKS OF INVESTING IN HIGH YIELD SECURITIES -------------------------------------------------------------------------------- Balanced Fund may invest up to 25% of its total assets in securities rated below investment-grade. Securities rated below investment grade are referred to as high yield securities or "junk bonds." Junk bonds are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of junk bonds may be more likely to experience financial stress, especially if such issuers are highly leveraged. In addition, the market for junk bonds is relatively new and has not weathered a major economic recession, and it is unknown what effects such a recession might have on such securities. During such periods, such issuers may not have sufficient cash flows to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to the creditors of the issuer. While most of the junk bonds in which Balanced Fund may invest do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. Junk bonds frequently have call or redemption features that would permit an issuer to repurchase the security from the Fund. If a call were exercised by the issuer during a period of declining interest rates, the Fund likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to shareholders. Junk bonds tend to be more volatile than higher-rated fixed income securities, so that adverse economic events may have a greater impact on the prices of junk bonds than on higher-rated fixed income securities. Factors adversely affecting the market value of such securities are likely to affect adversely the Fund's net asset value. Like higher-rated fixed income securities, junk bonds generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the junk bond market, which may be less liquid than the market for higher-rated fixed income securities, even under normal economic conditions. Also there may be significant disparities in the prices quoted for junk bonds by various dealers. Adverse economic conditions and investor perceptions thereof (whether or not based on economic fundamentals) may impair the liquidity of this market and may cause the prices the Fund receives for its junk bonds to be reduced. In addition, the Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgment may play a greater role in valuing certain of the Fund's portfolio securities than in the case of securities trading in a more liquid market. In addition, the Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. RATINGS OF DEBT SECURITIES -------------------------------------------------------------------------------- Investment grade debt securities are rated AAA, AA, A or BBB by Standard & Poor's ("S& P"), Fitch Inc. ("Fitch"); or Aaa, Aa, A or Baa by Moody's Investors Services ("Moody's"). Investment grade municipal notes are rated MIG 1, MIG 2, MIG 3 or MIG 4 (VMIG 1, VMIG 2, VMIG 3 or VMIG 4 for notes with a demand feature) by Moodys or SP-1 or SP-2 by S&P. Securities rated Baa, MIG 4, VMIG 4 or BBB are medium grade, involve some speculative elements and are the lowest investment grade available. These securities generally have less certain protection of principal and interest payments than higher rated securities. Securities rated Ba or BB (in which Large Cap Fund, Balanced Fund and Developing Markets Growth Fund may invest) are judged to have some speculative elements with regard to capacity to 24 pay interest and repay principal. Debt securities rated C (in which the Developing Markets Growth Fund may invest) are regarded as having predominantly speculative characteristics. DEBT SECURITIES RATED BELOW INVESTMENT GRADE ARE COMMONLY KNOWN AS JUNK BONDS. Presently, other than with respect to the Balanced Fund, the Adviser intends to invest only in debt securities rated at investment grade at the time of purchase, or if not rated, deemed by the Adviser to be of comparable quality. See Appendix A for further information about ratings. SECURITIES LENDING -------------------------------------------------------------------------------- Each Fund may lend portfolio securities to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 33-1/3% of the value of a Fund's total assets. The lending of portfolio securities may increase the average annual return to shareholders. Lending of portfolio securities also involves certain risks to a Fund. As with other extensions of credit, there are risks of delay in recovery of loaned securities, or even loss of rights in collateral pledged by the borrower, should the borrower fail financially. However, the Funds will only enter into loan agreements with broker-dealers, banks, and other institutions that the Adviser has determined are creditworthy. The Funds may also experience a loss if, upon the failure of a borrower to return loaned securities, the collateral is not sufficient in value or liquidity to cover the value of such loaned securities (including accrued interest thereon). However, the borrower will be required to pledge collateral that the custodian for a Fund's portfolio securities will take into possession before any securities are loaned. Additionally, the borrower may pledge only cash, securities issued or guaranteed by the U.S. Government or its agencies and instrumentalities, certificate of deposit or other high-grade, short-term obligations or interest-bearing cash equivalents as collateral. There will be a daily procedure to ensure that the pledged collateral is equal in value to at least 100% of the value of the securities loaned. Under such procedure, the value of the collateral pledged by the borrower as of any particular business day will be determined on the next succeeding business day. If such value is less than 100% of the value of the securities loaned, the borrower will be required to pledge additional collateral. The risks of borrower default (and the resultant risk of loss to a Fund) also are reduced by lending only securities for which a ready market exists. This will reduce the risk that the borrower will not be able to return such securities due to its inability to cover its obligation by purchasing such securities on the open market. To the extent that collateral is comprised of cash, a Fund will be able to invest such collateral only in securities issued or guaranteed by the U.S. Government or its agencies and instrumentalities and in certificates of deposit or other high-grade, short-term obligations or interest-bearing cash equivalents. If a Fund invests cash collateral in such securities, the Fund could experience a loss if the value of such securities declines below the value of the cash collateral pledged to secure the loaned securities. The amount of such loss would be the difference between the value of the collateral pledged by the borrower and the value of the securities in which the pledged collateral was invested. Although there can be no assurance that the risks described above will not adversely affect a Fund, the Adviser believes that the potential benefits that may accrue to a Fund as a consequence of securities lending will outweigh any such increase in risk. PORTFOLIO TURNOVER -------------------------------------------------------------------------------- To attain the investment goals of the Funds, the Adviser will usually hold securities for the long-term. However, if weak or declining market values for stocks are anticipated, the Adviser may convert any portion of these Fund assets to cash or short-term securities as a temporary, defensive position. Generally, none of the Funds will trade in securities for short-term profits, but if circumstances warrant, securities may be sold without regard to length of time held. Debt securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold. Increased turnover results in increased brokerage costs and may result in higher transaction costs for the Funds and may affect the taxes shareholders pay. If a security that has been held for less than the holding period set by law is sold, any resulting gains will be taxed in the same manner as ordinary income as opposed to long-term capital gain. Each Fund's turnover rate may vary from year to year. For additional information, refer to the "Brokerage" and "Taxes" sections below. The portfolio turnover rates for each of the Funds are contained in the Financial Highlights tables in the prospectus. 25 ADDITIONAL INFORMATION ABOUT SELLING SHARES -------------------------------------------------------------------------------- SUSPENSION OF SELLING ABILITY -------------------------------------------------------------------------------- Each Fund may suspend selling privileges or postpone the date of payment: - During any period that the NYSE is closed other than customary weekend or holiday closings, or when trading is restricted, as determined by the Securities and Exchange Commission ("SEC"); - During any period when an emergency exists, as determined by the SEC, as a result of which it is not reasonably practical for the Fund to dispose of securities owned by it or to fairly determine the value of its assets; - For such other periods as the SEC may permit. TELEPHONE TRANSACTIONS -------------------------------------------------------------------------------- Once you place a telephone transaction request to Sit Mutual Funds, it cannot be canceled or modified. The Funds use reasonable procedures to confirm that telephone instructions are genuine, including requiring that payments be made only to the shareholder's address of record or the bank account designated on the application and requiring certain means of telephone identification. If the Fund fails to employ such procedures, it may be liable for any losses suffered by Fund shareholders as a result of unauthorized or fraudulent instructions. During times of chaotic economic or market circumstances, a shareholder may have difficulty reaching the Funds by telephone. Consequently, a redemption or exchange by telephone may be difficult to implement at those times. REDEMPTION-IN-KIND -------------------------------------------------------------------------------- If the Adviser determines that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other financial assets, valued for this purpose as they are valued in computing the NAV for a Fund's shares, consistent with Rule 18(f)(1) of the Investment Company Act of 1940. Shareholders receiving securities or other financial assets on redemption may realize a gain or loss for tax purposes and will incur any costs of sale, as well as the associated inconveniences. COMPUTATION OF NET ASSET VALUE -------------------------------------------------------------------------------- Net asset value is determined as of the close of the New York Stock Exchange on each day that the exchange is open for business and on any other day on which there is sufficient trading in a Fund's securities to materially affect the Fund's net asset value per share. The customary national business holidays observed by the New York Stock Exchange and on which the Funds are closed are: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day and Christmas Day. The net asset value per share will not be determined on these national holidays. The net asset value is calculated by dividing the total value of a Fund's investments and other assets (including accrued income), less any liabilities, by the number of shares outstanding. The net asset value per share of each Fund will fluctuate. Securities which are traded on an exchange or on the NASDAQ over-the-counter market are valued at the last quoted sale price of the day. Lacking a last sale price, a security is generally valued at its last bid price. All other securities for which over-the-counter market quotations are readily available are valued at their last bid price. When market quotations are not readily available, or when restricted securities are being valued, such securities are valued at fair value using methods selected in good faith by the Boards of Directors. Debt securities may be valued on the basis of prices furnished by a pricing service when the Adviser believes such prices accurately reflect the fair market value of such securities. Such a pricing service utilizes electronic data processing techniques to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices. When prices are not readily available from a pricing service, or when restricted or illiquid securities are being valued, securities may be valued at fair value using methods selected in good faith by the Boards of Directors. Short-term investments in debt securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation. The amortized cost method of valuation will be used only if the Boards of Directors, in good faith, determine that the fair value of the securities shall be their amortized cost value, unless the particular circumstances dictate otherwise. 26 Any assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars at the official exchange rate or, alternatively, at the mean of the current bid and ask prices of such currencies against the U.S. dollar last quoted by a major bank that is a regular participant in the foreign exchange market or on the basis of a pricing service that takes into account the quotes provided by a number of such major banks. If neither of these alternatives is available or both are deemed not to provide a suitable methodology for converting a foreign currency into U.S. dollars, the Boards of Directors in good faith will establish a conversion rate for such currency. Foreign securities trading may not take place on all days on which the New York Stock Exchange is open. Further, trading takes place in various foreign markets on days on which the Exchange is not open and therefore the Fund's net asset value is not calculated. The calculation of the International Growth Fund and Developing Markets Growth Fund's net asset value therefore may not take place contemporaneously with the determination of the prices of securities held by these Funds. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of the Exchange will not be reflected in the Developing Markets Growth Fund or International Growth Fund's net asset value unless management, under the supervision of the Board of Directors, determines that the particular event would materially affect the net asset value. As a result, the Developing Markets Growth Fund or International Growth Fund's net asset value may be significantly affected by such trading on days when the Fund is not open for shareholder purchases and redemptions. On June 30, 2001, the net asset value and public offering price per share for each Fund was calculated as follows: Balanced Fund: net assets $24,946,757 ------------------------------ shares outstanding 1,626,930 = net asset value (NAV) per share = public offering price per share $15.33 Large Cap Growth Fund: net assets $122,829,437 ------------------------------ shares outstanding 3,150,536 = NAV per share = public offering price per share $38.99 Mid Cap Growth Fund: net assets $360,036,647 ------------------------------ shares outstanding 29,108,134 = NAV per share = public offering price per share $12.37 International Growth Fund: net assets $123,084,706 ------------------------------ shares outstanding 8,426,328 = NAV per share = public offering price per share $14.61 Small Cap Growth Fund: net assets $227,887,807 ------------------------------ shares outstanding 7,862,189 = NAV per share = public offering price per share $28.99 Science and Technology Growth Fund: net assets $30,453,310 ------------------------------ shares outstanding 1,999,917 = NAV per share = public offering price per share $15.23 Developing Markets Growth Fund: net assets $13,876,516 ------------------------------ shares outstanding 1,513,813 = NAV per share = public offering price per share $9.17 CALCULATION OF PERFORMANCE DATA -------------------------------------------------------------------------------- Advertisements and other sales literature for the Funds may refer to cumulative total return and average annual total return. All such figures are based on historical performance data and are not intended to be indicative of future performance. The investment return on and principal value of an investment in the Funds will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Funds may compare performance with that of other mutual funds, indices and other competing investment and deposit products. The composition of these indices or products differs from that of the Funds. The comparison of the Funds to an alternative investment should be made with 27 consideration of differences in features and expected performance. The Funds may also be mentioned in newspapers, magazines, or other media from time to time. The Funds assume no responsibility for the accuracy of such data. CUMULATIVE TOTAL RETURN. Total return means cumulative total return and is calculated by finding the cumulative compounded rate of return over the period indicated that would equate the initial amount invested to the ending redeemable value, according to the following formula: (ERV - P) CTR = ------- x 100 P CTR = cumulative total return ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period P = initial payment of $1,000 This calculation assumes all dividends and capital gains distributions are reinvested at net asset value on the appropriate reinvestment dates and includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. The Funds' cumulative total returns for the period ended June 30, 2001 were: 1-Year 5-Years 10-Years Inception ------ ------- -------- --------- Balanced Fund -16.39% 65.51% -- 120.70%(1) Large Cap Growth Fund -32.92 76.68 248.56% 1111.83(2) Mid Cap Growth Fund -35.21 71.71 261.15 1850.18(2) International Growth Fund -36.43 11.49 -- 99.61(3) Small Cap Growth Fund -28.79 100.34 -- 291.52(4) Science and Technology Growth Fund -52.96 -- -- 57.02(5) Developing Markets Growth Fund -31.72 -16.16 -- -7.63(4) (1) 12/31/93 Fund inception (4) 7/1/94 Fund inception (2) 9/2/82 Fund inception (5) 12/31/97 Fund inception (3) 11/1/91 Fund inception AVERAGE ANNUAL TOTAL RETURN. Average annual total return is computed by finding the average annual compounded rates of return over the periods indicated that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1+T) n = ERV P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years; and ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period. This calculation assumes all dividends and capital gains distributions are reinvested at net asset value on the appropriate reinvestment dates and includes all recurring fees, such as investment advisory and management fees, charged to all shareholder accounts. The Funds' average annual total returns for the period ended June 30, 2001 were: 1-Year 5-Years 10-Years Inception ------ ------- -------- --------- Balanced Fund -16.39% 10.60% -- 11.13%(1) Large Cap Growth Fund -32.92 12.06 13.30% 14.16(2) Mid Cap Growth Fund -35.21 11.42 13.70 17.08(2) International Growth Fund -36.43 2.20 -- 7.41(3) Small Cap Growth Fund -28.79 14.91 -- 21.52(4) Science and Technology Growth Fund -52.96 -- -- 13.76(5) Developing Markets Growth Fund -31.72 -3.46 -- -1.13(4) (1) 12/31/93 Fund inception (4) 7/1/94 Fund inception (2) 9/2/82 Fund inception (5) 12/31/97 Fund inception (3) 11/1/91 Fund inception 28 MANAGEMENT -------------------------------------------------------------------------------- The Large Cap Growth Fund, Mid Cap Growth Fund, and the corporate issuer of the Balanced Fund, International Growth Fund, Small Cap Growth Fund, Science and Technology Growth Fund and Developing Markets Growth Fund, have corporate officers and Boards of Directors. Pursuant to Minnesota law, the Boards of Directors are responsible for the management of the Funds and the establishment of the Funds' policies. The officers of the Funds manage the day-to-day operation of the Funds. Through December 31, 2000, the Sit Funds as a group (a total of 12 Funds) paid each director, who is not also an officer, an annual total fee of $15,000, $2,500 for each meeting attended, and provided reimbursement for travel and other expenses. The following table sets forth the aggregate compensation received by each Director for services provided to the twelve funds of the Sit Mutual Funds for the fiscal year ended June 30, 2001. Pursuant to each Fund's investment management agreement with the Adviser, the Adviser is obligated to pay the Funds' expenses, including fees paid to the directors. (See discussion under "Investment Adviser" below.) Directors who are officers of the Adviser or any of its affiliates did not receive any such compensation and are not included in the table.
Pension or Aggregate Retirement Benefits Estimated Total Compensation Accrued As Part Annual Benefits Compensation From Director From Each Fund of Fund Expenses Upon Retirement Fund Complex ------------------------------------------------------------------------------------------------- John E. Hulse $2,084 None None $25,000 William E. Frenzel 2,084 None None 25,000 Sidney L. Jones 2,084 None None 25,000 Donald W. Phillips 2,084 None None 25,000
The Funds and their investment adviser and principal underwriter have adopted a code of ethics under rule 17j-1 of the Investment Company Act which permits personnel subject to the code to invest in securities, including securities that may be purchased or held by the Funds. The names, ages, addresses, principal occupations and other affiliations of directors and officers of the Funds are given below. Except as noted below, the business address of each officer and director is the same as that of the Adviser - 4600 Wells Fargo Center, Minneapolis, Minnesota.
NAME (AGE) & ADDRESS POSITION WITH THE FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS -------------------- ----------------------- ---------------------------------------- Eugene C. Sit, CFA (62)* Director and Chairman Chairman, CEO and CIO of Sit Investment Associates, Inc. (the "Adviser"); Chairman, CEO and CIO of Sit/Kim International Investment Associates, Inc. (the "Sub-Adviser"); Director and Chairman of the Funds and Director of SIA Securities Corp. (the "Distributor") Peter L. Mitchelson, CFA (60)* Director and Vice President and Director of the Adviser; Executive Vice Chairman; Sr. Portfolio President and Director of the Sub-Adviser; Director and Manager - Large Cap Vice Chairman of the Funds; Director of the Distributor Growth and Balanced Funds William E. Frenzel (73)* Director Director of the Sit Funds; Advisory Director of the Adviser; 6310 Stoneham Lane Director of the Sub-Adviser; Senior Visiting Scholar at The McLean, VA 22101 Brookings Institution; Former senior member of Congress and a ranking member on the House Ways and Means Committee and Vice Chairman of the House Budget Committee until 1991 John E. Hulse (68) Director Director of the Sit Funds; Trustee, Pacific Gas & Electric 4303 Quail Run Lane Nuclear Decommissioning Trust; Director, Vice Chairman and Danville, CA 94506 CFO at Pacific Telesis Group until 1992
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NAME (AGE) & ADDRESS POSITION WITH THE FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS -------------------- ----------------------- ---------------------------------------- Sidney L. Jones (67) Director Director of the Sit Funds; Lecturer, Washington Campus 8505 Parliament Drive Consortium of 17 Universities; Senior Adviser to Lawrence Potomac, MD 20854 and Company - Toronto, Canada; Former Professor of Finance, University of Michigan; Former Assistant Secretary for Economic Policy, United States Department of the Treasury until 1992 Donald W. Phillips (53) Director Director of the Sit Funds; CEO of WestAm; President of 10 S. Wacker Drive, #2960 Forstmann-Leff International Inc. until 2000; Executive Chicago, IL 60606 Vice President and Director of Equity Financial and Management Company until 1997; Chairman of Equity Institutional Investors, Inc. until 1997 Melvin C. Bahle (81) Director Emeritus Director Emeritus of the Sit Funds; Director of the Sit Funds #1 Muirfield Lane until October 1995; Financial consultant; Director and/or St. Louis, MO 63141 Officer of several companies, foundations and religious organizations Roger J. Sit (39) Executive Vice President Executive Vice President of the Adviser and the Sub-Adviser; Vice President and Senior Equity Research Analyst for Goldman Sachs & Company until January, 1998 Erik S. Anderson, CFA (58) Vice President - Investments Vice President - Research and Investment Management of the Adviser Bryce A. Doty, CFA (34) Vice President - Investments Vice President - Investments of the Balanced Fund Balanced Fund John T. Groton, Jr., CFA (36) Vice President - Investments Vice President - Research and Investment Management of the Adviser Robert W. Sit, CFA (32) Vice President - Investments Vice President -Research and Investment Management of the Adviser Ronald D. Sit, CFA (42) Vice President - Investments Vice President - Research and Investment Management of the Adviser Michael P. Eckert (46) Vice President Vice President - Institutional Client Group of the Sit Funds Shelley H. Shutes (44) Vice President Vice President - Investor Services of the Sit Funds Michael J. Radmer (56) Secretary Secretary of the Sit Funds; Partner of the Funds' general 220 South Sixth Street counsel, Dorsey & Whitney LLP Minneapolis, MN Paul E. Rasmussen (40) Vice President & Treasurer Vice President, Secretary and Controller for the Adviser and Sub-Adviser; Vice President and Treasurer of the Sit Funds; President and Treasurer of the Distributor Carla J. Rose (35) Vice President, Assistant Vice President - Administration & Deputy Controller for the Secretary & Assistant Adviser Treasurer
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NAME (AGE) & ADDRESS POSITION WITH THE FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS -------------------- ----------------------- ---------------------------------------- Kelly K. Boston (33) Assistant Secretary & Staff Attorney for the Adviser Assistant Treasurer
------------------- * Directors who are deemed to be "interested persons" of the Funds as that term is defined by the Investment Company Act of 1940. Eugene Sit and Peter Mitchelson are interested persons because they are officers of the Adviser. William Frenzel is an interested person of the International Growth Fund and Developing Markets Growth Fund because he is a director of the Sub-Adviser, and may be deemed to be an interested person of all Funds because he is an advisory director and shareholder of the Adviser. Mr. Roger Sit, Mr. Ron Sit, and Mr. Robert Sit are sons of Eugene C. Sit. INVESTMENT ADVISER -------------------------------------------------------------------------------- The Adviser (or an affiliate) has served as the investment adviser for each Fund since the inception of each Fund. TERMS COMMON TO ALL FUNDS' INVESTMENT MANAGEMENT AGREEMENTS -------------------------------------------------------------------------------- Each Fund's Investment Management Agreement provides that the Adviser will manage the investment of the Fund's assets, subject to the applicable provisions of the Fund's articles of incorporation, bylaws and current registration statement (including, but not limited to, the investment objective, policies and restrictions delineated in the Fund's current prospectus and Statement of Additional Information), as interpreted from time to time by the Fund's Board of Directors. Under each Agreement, the Adviser has the sole and exclusive responsibility for the management of the Fund's investment portfolio and for making and executing all investment decisions for the Fund. The Adviser is obligated under each Agreement to report to the Fund's Board of Directors regularly at such times and in such detail as the Board may from time to time determine appropriate, in order to permit the Board to determine the adherence of the Adviser to the Fund's investment policies. Each Agreement also provides that the Adviser shall not be liable for any loss suffered by the Fund in connection with the matters to which the Agreement relates, except losses resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its obligations and duties or by reason of its reckless disregard of its obligations and duties under the Agreement. Each Agreement provides that the Adviser shall, at its own expense, furnish all office facilities, equipment and personnel necessary to discharge its responsibilities and duties under the Agreement and that the Adviser will arrange, if requested by the Fund, for officers or employees of the Adviser to serve without compensation from the Fund as directors, officers or employees of the Fund if duly elected to such positions by the shareholders or directors of the Fund. Each Agreement provides that the Adviser will bear all of the Fund's expenses, except for extraordinary expenses (as designated by a majority of the Fund's disinterested directors), interest, brokerage commissions and other transaction charges relating to the investing activities of the Fund. Each Investment Management Agreement provides that it will continue in effect from year to year only as long as such continuance is specifically approved at least annually by the applicable Fund's Board of Directors or shareholders and by a majority of the Board of Directors who are not "interested persons" (as defined in the 1940 Act) of the Adviser or the Fund. Each Agreement is terminable upon 60 days' written notice by the Adviser or the Fund and will terminate automatically in the event of its "assignment" (as defined in the 1940 Act). COMPENSATION AND ALLOCATION OF EXPENSES -------------------------------------------------------------------------------- Under each of the Fund's Investment Management Agreement, the Fund is obligated to pay the Adviser a flat monthly fee, which is equal on an annual basis to the following percentages of the average daily net assets of the Funds: Sit Balanced Fund 1.00% Sit Large Cap Growth Fund, Inc. 1.00% Sit Mid Cap Growth Fund, Inc. 1.25%(1) Sit International Growth Fund 1.85%(2) Sit Small Cap Growth Fund 1.50% Sit Science and Technology Growth Fund 1.50%(3) Sit Developing Markets Growth Fund 2.00% 31 (1) For the period November 1, 1996 through December 31, 2000, the Adviser has voluntarily agreed to limit the management fee (and thereby, all Fund expenses, except those not payable by the Adviser as set forth above) of the Mid Cap Growth Fund to 1.00% of the Fund's average daily net assets. From January 1, 2001, through December 31, 2002, the Adviser has voluntarily agreed to limit the management fee (and thereby, all Fund expenses, except those not payable by the Adviser as set forth above) of the Mid Cap Growth Fund to 1.15% of the Fund's average daily net assets. After December 31, 2002, this voluntary fee waiver may be discontinued by the Adviser in its sole discretion. (2) For the period January 1, 1994 through December 31, 2002, the Adviser has voluntary agreed to limit the management fee (and thereby, all Fund expenses, except those not payable by the Adviser as set forth above) of the International Growth Fund to 1.50% per year of the Fund's average daily net assets. After December 31, 2002, this voluntary fee waiver may be discontinued by the Adviser in its sole discretion. (3) For the period December 31, 1997 (date of inception) through December 31, 2000, the Adviser has voluntarily agreed to limit the management fee (and thereby, all Fund expenses, except those not payable by the Adviser as set forth above) to 1.25% of the Science and Technology Growth Fund's average daily net assets. From January 1, 2001, through December 31, 2002, the Adviser has voluntarily agreed to limit the management fee (and thereby, all Fund expenses, except those not payable by the Adviser as set forth above) to 1.35% of the Science and Technology Growth Fund's average daily net assets. After December 31, 2002, this voluntary fee waiver may be discontinued by the Adviser in its sole discretion. Set forth below are the investment management fees and other expenses paid by each of the Large Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Balanced Fund, International Growth Fund, and Developing Markets Growth Fund during the fiscal years ended June 30, 2001, 2000, and 1999. Fees and expenses of the Funds waived or paid by the Adviser during such fiscal years are also set forth below.
LARGE CAP MID CAP SMALL CAP GROWTH GROWTH GROWTH BALANCED 2001 FUND FUND FUND FUND ---- ------------ ------------ ------------ ----------- Investment Advisory Fees 1,522,201 5,993,546 3,656,392 246,565 Fees Waived 00 (904,938) 00 00 Net Fund Expenses 1,522,201 5,088,608 3,656,392 246,565
SCIENCE AND DEVELOPING TECHNOLOGY INT'L MARKETS GROWTH GROWTH GROWTH 2001 (CONTINUED) FUND FUND FUND ---- ----------- ------------ ----------- Investment Advisory Fees 615,207 2,690,551 271,556 Fees Waived (86,391) (509,023) 00 Net Fund Expenses 528,816 2,181,528 271,556
LARGE CAP MID CAP SMALL CAP GROWTH GROWTH GROWTH BALANCED 2000 FUND FUND FUND FUND ---- ------------ ------------ ----------- ---------- Investment Advisory Fees 1,545,264 6,048,102 1,541,681 147,510 Fees Waived 00 (1,209,620) 00 00 Net Fund Expenses 1,545,264 4,838,482 1,541,681 147,510
SCIENCE AND DEVELOPING TECHNOLOGY INT'L MARKETS GROWTH GROWTH GROWTH 2000 (CONTINUED) FUND FUND FUND ---- ----------- ------------ ----------- Investment Advisory Fees 409,752 2,473,465 256,816 Fees Waived (68,292) (467,953) 00 Net Fund Expenses 341,460 2,005,512 256,816
32
LARGE CAP MID CAP SMALL CAP REGIONAL GROWTH GROWTH GROWTH GROWTH 1999 FUND FUND FUND FUND ---- ----------- ------------ ----------- ---------- Investment Advisory Fees 1,250,402 4,328,283 683,493 74,226 Fees Waived 00 (865,657) 00 (14,845) -- --------- -- -------- Net Fund Expenses 1,250,402 3,462,626 683,493 59,381
SCIENCE AND DEVELOPING TECHNOLOGY INT'L MARKETS GROWTH BALANCED GROWTH GROWTH 1999 (CONTINUED) FUND FUND FUND FUND ---- ---------- ---------- ----------- ----------- Investment Advisory Fees 132,050 86,957 1,718,057 208,718 Fees Waived (22,008) 00 (325,038) 00 -------- -- --------- -- Net Fund Expenses 110,042 86,957 1,393,019 208,718
THE SUB-ADVISER - INTERNATIONAL GROWTH FUND AND DEVELOPING MARKETS GROWTH FUND -------------------------------------------------------------------------------- The International Growth Fund's and Developing Markets Growth Fund's Investment Management Agreements authorize the Adviser, at its option and at its sole expense, to appoint a sub-adviser, which may assume all or such responsibilities and obligations of the Adviser pursuant to the Investment Management Agreement as shall be delegated to the sub-adviser; provided, however, that any discretionary investment decisions made by the sub-adviser shall be subject to approval or ratification by the Adviser, and any appointment of a sub-adviser and assumption of responsibilities and obligations of the Adviser by such sub-adviser shall be subject to approval by the Board of Directors, and as required by law the shareholders, of the Company; and provided, further, that the appointment of any sub-adviser shall in no way limit or diminish the Adviser's obligations and responsibilities under the Investment Management Agreement. Pursuant to this authority, the Sub-Adviser serves as International Growth Fund's and Developing Markets Growth Fund's Sub-Adviser. The current Sub-Advisory Agreement provides that the Sub-Adviser agrees to manage the investment of International Growth Fund's and Developing Markets Growth Fund's assets, subject to the applicable provisions of the Funds' articles of incorporation, bylaws and current registration statement (including, but not limited to, the investment objective, policies and restrictions delineated in the Funds' current prospectus and Statement of Additional Information), as interpreted from time to time by the Fund's Board of Directors. The Agreement also provides that any discretionary investment decisions made by the Sub-Adviser are subject to the Adviser's review, approval or ratification at the Adviser's discretion. For its services under the Sub-Advisory Agreement, absent any voluntary fee waivers, the Adviser has agreed to pay the Sub-Adviser a monthly fee equal to the percentages set forth below of the value of the International Growth Fund's and Developing Markets Growth Fund's average daily net assets:
International Growth Developing Markets Fund Growth Fund -------------------- ------------------ First $100 million of average daily net assets .75% .75% Next $100 million of average daily net assets .50% .60% Assets in excess of $200 million .40% .50%
Pursuant to the Investment Management Agreement the Adviser paid the Sub-Adviser fees of $$602,981, $822,626 and $877,667 for the fiscal years ended June 30, 1999, 2000 and 2001, respectively, with respect to services provided on behalf of the International Growth Fund; and fees of $78,208, $96,849 and $102,113 for the fiscal years ended June 30, 1999, 2000 and 2001, respectively, with respect to services provided on behalf of the Developing Markets Growth Fund. The Sub-Advisory Agreement continues in effect from year to year with respect to a Fund only as long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Fund or by the vote of a majority of the outstanding voting shares of the Fund, and (ii) by the vote of a majority of the directors of the Company who are not parties to the Agreement or interested persons of the Adviser, the Sub-Adviser, the International Growth Fund or the Developing Markets Growth Fund. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Directors of Sit Mutual Funds, Inc., the issuer of the International Growth Fund and Developing Markets Growth Fund or by 33 the vote of a majority of the outstanding voting shares of the Fund, or by the Sub-Adviser or the Adviser, upon 30 days' written notice to the other party. Additionally, the Agreement automatically terminates in the event of its assignment. DISTRIBUTOR -------------------------------------------------------------------------------- Each of the Funds have entered into Underwriting and Distribution Agreements with SIA Securities Corp. ("Securities"), an affiliate of the Adviser, pursuant to which Securities acts as each Fund's principal underwriter. Securities markets each Fund's shares only to certain institutional investors and all other sales of each Fund's shares are made by each Fund. The Adviser will pay all expenses of Securities in connection with such services and Securities is otherwise not entitled to any other compensation under the Underwriting and Distribution Agreement. Each Fund will incur no additional fees in connection with the Underwriting and Distribution Agreement. Pursuant to the Underwriting and Distribution Agreement, Securities has agreed to act as the principal underwriter for each Fund in the sale and distribution to the public of shares of each Fund, either through dealers or otherwise. Securities has agreed to offer such shares for sale at all times when such shares are available for sale and may lawfully be offered for sale and sold. The Underwriting and Distribution Agreement is renewable from year to year if the Fund's directors approve such agreement. The Fund or Securities can terminate the Underwriting and Distribution Agreement at any time without penalty on 60 days' notice written notice to the other party. The Underwriting and Distribution Agreement terminates automatically upon its assignment. In the Underwriting and Distribution Agreement, Securities agrees to indemnify each Fund against all costs of litigation and other legal proceedings and against any liability incurred by or imposed on the Fund in any way arising out of or in connection with the sale or distribution of each Fund's shares, except to the extent that such liability is the result of information which was obtainable by Securities only from persons affiliated with the Fund but not Securities. Securities or the Adviser may enter into agreements with various brokerage or other firms pursuant to which such firms provide certain administrative services with respect to customers who are beneficial owners of shares of the Funds. The Adviser or Securities may compensate such firms for the services provided, which compensation is based on the aggregate assets of customers that are invested in the Funds. BROKERAGE -------------------------------------------------------------------------------- Transactions on a stock exchange in equity securities will be executed primarily through brokers that will receive a commission paid by the applicable Fund. Fixed income securities, as well as equity securities traded in the over-the-counter market, are generally traded on a "net" basis with dealers acting as principals for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. In underwritten fixed income and equity offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's selling concession or discount. Certain of these securities may also be purchased directly from the issuer, in which case neither commissions nor discounts are paid. The Adviser (or Sub-Adviser, as applicable) selects and, where applicable, negotiates commissions with the broker-dealers who execute the transactions for one or more of the Funds. The primary criterion for the selection of a broker-dealer is the ability of the broker-dealer, in the opinion of the Adviser (or Sub-Adviser, as applicable), to secure prompt execution of the transactions on favorable terms, including the best price of the security, the reasonableness of the commission and considering the state of the market at the time. When consistent with these objectives, business may be placed with broker-dealers who furnish investment research or services to the Adviser or Sub-Adviser. Such research or services 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. Such services also may include an account trading and order management system and analyses and reports concerning investment issues, industries, securities, economic factors and trends, portfolio strategy, and the performance of certain accounts. Some services may require the use of hardware provided by the information provider. This allows the Adviser (or Sub-Adviser, as applicable) to supplement its own investment research activities and enables the Adviser (or Sub-Adviser, as applicable) to obtain the views and information of individuals and research staffs of many different securities firms prior to making investment decisions for the Funds. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser or Sub-Adviser, the Adviser or Sub-Adviser receives a benefit, not capable of valuation in dollar amounts, without providing any direct monetary benefit to the applicable Funds from these transactions. The Adviser and the Sub-Adviser believe that most 34 research services they receive generally benefit several or all of the investment companies and private accounts which they manage, as opposed to solely benefiting one specific managed fund or account. Normally, research services obtained through managed funds or accounts investing in common stocks would primarily benefit the managed funds or accounts which invest in common stock; similarly, services obtained from transactions in fixed income securities would normally be of greater benefit to the managed funds or accounts which invest in debt securities. Both the Adviser and the Sub-Adviser maintain an informal list of broker-dealers, which is used from time to time as a general guide in the placement of Fund business, in order to encourage certain broker-dealers to provide the Adviser and the Sub-Adviser with research services which the Adviser and the Sub-Adviser anticipate will be useful to them in managing the Funds. Because the list is merely a general guide, which is to be used only after the primary criterion for the selection of broker-dealers (discussed above) has been met, substantial deviations from the list are permissible and may be expected to occur. Each of the Adviser and the Sub-Adviser will authorize a Fund to pay an amount of commission for effecting a securities transaction in excess of the amount of commission another broker-dealer would have charged only if the Adviser (or Sub-Adviser, as applicable) determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either that particular transaction or the Adviser's or Sub-Adviser's overall responsibilities with respect to the accounts as to which it exercises investment discretion. Generally, the Fund pays commissions higher than the lowest commission rates available. Some investment companies enter into arrangements under which a broker-dealer agrees to pay the cost of certain products or services (not including research services) in exchange for fund brokerage ("brokerage/services arrangements"). Under a typical brokerage/service arrangement, a broker agrees to pay a fund's custodian fees or transfer agent fees and, in exchange, the fund agrees to direct a minimum amount of brokerage to the broker. The Adviser does not intend to enter into such brokerage/service arrangements on behalf of the Funds. Some investment companies enter into arrangements that provide for specified or reasonably ascertainable fee reductions in exchange for the use of fund assets ("expense offset arrangements"). Under such expense offset agreements, expenses are reduced by foregoing income rather than by re-characterizing them as capital items. For example, a fund may have a "compensating balance" agreement with its custodian under which the custodian reduces its fee if the fund maintains cash or deposits with the custodian in non-interest bearing accounts. The Adviser does not intend to enter into expense offset agreements involving assets of the Funds Most domestic (U.S.) securities trades will be executed through U.S. brokerage firms and commercial banks. Most foreign equity securities will be obtained in over-the-counter markets or stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market. The fixed commissions paid in connection with most such foreign stock transactions generally are higher than negotiated commissions on United States transactions. There generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States. Foreign security settlements may in some instances be subject to delays and related administrative uncertainties. Foreign equity securities may be held in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), or securities convertible into foreign equity securities. ADRs or EDRs may be listed on stock exchanges, or traded in the over-the-counter markets in the United States or Europe, as the case may be. ADRs, like other securities traded in the United States, will be subject to negotiated commission rates. The foreign and domestic debt securities and money market instruments in which International Growth Fund and Developing Markets Growth Fund may invest are generally traded in the over-the-counter markets. Fund management does not currently anticipate that the Fund will effect brokerage transactions in its portfolio securities with any broker-dealer affiliated directly or indirectly with the Funds, the Adviser or the Sub-Adviser. The Adviser has entered into agreements with Capital Institutional Services, Inc. ("CIS"), and Autranet, Inc. ("AI"), unaffiliated registered broker-dealers. All transactions placed with CIS and LAS are subject to the above criteria. CIS and AI provide the Adviser with a wide variety of economic, performance, and investment research information from (but not limited to) Egan-Jones Rating Company, Fitch Inc., Moody's Investors Service Inc., Municipal Market Data, Standard & Poor's, Bloomberg, L.P., Institutional Investor, TradWeb Service, Ried, Thurnberg & Co., Inc., and Stone & McCarthy Research Associates. 35 Investment decisions for each Fund are made independently of those for other clients of the Adviser, including the other Funds. When the Funds or clients simultaneously engage in the purchase or sale of the same securities, the price of the transactions is averaged and the amount allocated in accordance with a formula deemed equitable to each Fund and client. In some cases, this system may adversely affect the price paid or received by the Fund or the size of the position obtainable. Total brokerage commissions paid by the Funds for the three most recent fiscal years, as well as commissions paid to firms that supplied the Funds and Adviser with statistical and research services, are set forth below.
2001 ---- AMT. PAID TO AMT. PAID TO TOTAL FIRMS FOR FIRMS FOR BROKERAGE SOFT DOLLAR & TRADE, PRINCIPAL FUND COMMISSION RESEARCH & OTHER ---- ---------- -------- ------- Balanced $33,613 $12,304 $21,309 Large Cap Growth 172,105 111,182 60,923 Mid Cap Growth 753,539 343,104 410,435 International Growth 216,603 183,749 32,854 Small Cap Growth 610,837 189,190 421,647 Science and Technology Growth 56,317 17,173 39,144 Developing Markets Growth 32,538 26,135 6,403
2000 1999 ---- ---- AMT PAID TO AMT PAID TO TOTAL FIRMS FOR TOTAL FIRMS FOR BROKERAGE SERVICES & BROKERAGE SERVICES & FUND COMMISSION RESEARCH COMMISSION RESEARCH ---- ----------- -------- ---------- -------- Balanced $13,080 $4,305 $6,571 $3,962 Large Cap Growth 166,427 80,905 126,142 74,829 Mid Cap Growth 713,700 194,314 603,028 398,377 International Growth 281,342 201,924 288,891 266,092 Small Cap Growth 208,122 49,527 146,914 34,423 Science and Technology Growth 32,001 2,598 13,053 2,280 Developing Markets Growth 76,363 33,797 79,045 75,952
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES -------------------------------------------------------------------------------- The following persons owned of record or beneficially 5% or more of the respective Fund's outstanding shares as of October 12, 2001:
Record Beneficially Of Record & Person Only Only Beneficially ------ ------ ------------ ------------ BALANCED FUND ------------- Charles Schwab & Co., Inc., Special Custody Acct FBO Cust., 101 Montgomery Street, San Francisco, CA 15.36% Delaware Charter Guarantee & Trust, FBO Principal Financial, 1013 Centre Road, Wilmington, DE 13.67% Sit Investment Associates (various accounts) 4600 Wells Fargo Center Minneapolis, MN 9.27% Comerica Bank, FBO Pulte Corp. Inc., P.O. Box 75000/MC3446 Detroit, MI 9.06% National Financial Services Corp., FBO Cust., Church Street Station, P.O. Box 3908, New York, NY 5.05% LARGE CAP GROWTH FUND --------------------- Charles Schwab & Co., Inc., Special Custody Acct FBO Cust., 101 Montgomery Street, San Francisco, CA 12.80%
36
Record Beneficially Of Record & Person Only Only Beneficially ------ ------ ------------ ------------ MID CAP GROWTH FUND ------------------- Charles Schwab & Co., Inc., Special Custody Acct FBO Cust., 101 Montgomery Street, San Francisco, CA 11.12% INTERNATIONAL GROWTH FUND ------------------------- State Street Corporation, FBO Northrup Grumman Corp., 1840 Century Park East, Los Angeles, CA 24.87% Charles Schwab & Co., Special Custody Acct FBO Cust., 101 Montgomery St., San Francisco, CA 8.71% MAC & Co., Mutual Fund Operations, P.O. Box 3198, Pittsburgh, PA 5.82% SMALL CAP GROWTH FUND --------------------- Charles Schwab & Co., Special Custody Acct FBO Cust., 101 Montgomery St., San Francisco, CA 27.03% National Financial Services Corp., FBO Cust., Church Street Station, P.O. Box 3908, New York, NY 15.44% VALIC Separate Account, 2919 Allen Parkway L7-01, Houston, TX 5.79% DEVELOPING MARKETS GROWTH FUND ------------------------------ Charles Schwab & Co., Special Custody Acct FBO Cust., 101 Montgomery St., San Francisco, CA 36.77% National Financial Services Corp., FBO Cust., Church Street Station, P.O. Box 3908, New York, NY 7.56% SCIENCE AND TECHNOLOGY GROWTH FUND ---------------------------------- Donaldson lUFKIN Jenrette Securities Corporation Inc. P.O. Box 2052, Jersey City, NJ 5.32%
As of October 12, 2001, the officers and directors of the Sit Funds, as a group, owned 1.91% of the shares of the Balanced Fund; 3.46% of the shares of the Large Cap Growth Fund; 6.29% of the shares of the Mid Cap Growth Fund; 5.74% of the shares of the International Growth Fund; 5.76% of the shares of the Small Cap Growth Fund; 1.13% of the shares of the Developing Markets Growth Fund; and 6.17% of the shares of the Science and Technology Growth Fund. TAXES -------------------------------------------------------------------------------- Each Fund intends to fulfill the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a regulated investment company. If so qualified, each Fund will not be liable for federal income taxes to the extent it distributes its taxable income to its shareholders. To qualify under Subchapter M for tax treatment as a regulated investment company, each Fund must, among other things: (1) distribute to its shareholders at least 90% of its investment company taxable income (as that term is defined in the Code determined without regard to the deduction for dividends paid) and 90% of its net tax-exempt income; (2) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities, or other income derived with respect to its business of investing in such stocks, securities, or currency; and (3) diversify its holdings so that, at the end of each fiscal quarter of the Fund, (a) at least 50% of the market value of the Fund's assets is represented by cash, cash items, United States Government securities and securities of other regulated investment companies, and other securities, with these other securities limited, with respect to any one issuer, to an amount no greater than 5% of the Fund's total assets and no greater than 10% of the outstanding voting securities of such 37 issuer, and (b) not more than 25% of the market value of the Fund's total assets is invested in the securities of any one issuer (other than United States Government securities or securities of other regulated investment companies). Each Fund is subject to a non-deductible excise tax equal to 4% of the excess, if any, of the amount required to be distributed for each calendar year over the amount actually distributed. In order to avoid the imposition of this excise tax, each Fund must declare and pay dividends representing 98% of its net investment income for that calendar year and 98% of its capital gains (both long-term and short-term) for the twelve-month period ending October 31 of the calendar year. When shares of a Fund are sold or otherwise disposed of, the Fund shareholder will realize a capital gain or loss equal to the difference between the purchase price and the sale price of the shares disposed of, if, as is usually the case, the Fund shares are a capital asset in the hands of the Fund shareholder. In addition, pursuant to a special provision in the Code, if Fund shares with respect to which a long-term capital gain distribution has been made are held for six months or less, any loss on the sale or other disposition of such shares will be a long-term capital loss to the extent of such long-term capital gain distribution. Any loss on the sale or exchange of shares of a Fund generally will be disallowed to the extent that a shareholder acquires or contracts to acquire shares of the same Fund within 30 days before or after such sale or exchange. Some of the investment practices that may be employed by the Funds will be subject to special provisions that, among other things, may defer the use of certain losses of such Funds, affect the holding period of the securities held by the Funds and, particularly in the case of transactions in or with respect to foreign currencies, affect the character of the gains or losses realized. These provisions may also require the Funds to mark-to market some of the positions in their respective portfolios (i.e., treat them as closed out) or to accrue original discount, both of which may cause such Funds to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the distribution requirements for qualification as a regulated investment company and for avoiding income and excise taxes. Accordingly, in order to make the required distributions, a Fund may be required to borrow or liquidate securities. Each Fund will monitor its transactions and may make certain elections in order to mitigate the effect of these rules and prevent disqualification of the Funds as regulated investment companies. It is expected that any net gain realized from the closing out of forward currency contracts will be considered gain from the sale of securities or currencies and therefore be qualifying income for purposes of the 90% of gross income from qualified sources requirement, as discussed above. The Developing Markets Growth Fund and International Growth Fund may purchase the securities of certain foreign investment funds or trusts called passive foreign investment companies. Currently, such funds are the only or primary means by which the Funds may invest in Hungary and India. In addition to bearing their proportionate share of the Developing Markets Growth Fund's and International Growth Fund's expenses (management fees and operating expenses), shareholders will also bear indirectly similar expenses of such funds. Capital gains on the sale of such holdings will be deemed to be ordinary income regardless of how long the Fund holds its investment. In addition, the Developing Markets Growth Fund and International Growth Fund may be subject to corporate income tax and an interest charge on certain dividends and capital gains earned from these investments, regardless of whether such income and gains are distributed to shareholders. If more than 50% of the Developing Markets Growth Fund's and the International Growth Fund's total assets at the close of its fiscal year consist of securities of foreign corporations, each Fund will be eligible to, and may, file an election with the Internal Revenue Service pursuant to which shareholders will be required to include their pro rata portions of foreign taxes paid by the Fund as income received by them. Shareholders may then either deduct such pro rata portions in computing their taxable income or use them as foreign tax credits against their United States income taxes. If either Fund makes such an election, it will report annually to each shareholder the amount of foreign taxes to be included in income and then either deducted or credited. Dividends paid by Developing Markets Growth Fund and International Growth Fund will not be eligible for the 70% deduction for dividends received by corporations if, as expected, none of those Funds' income consists of dividends paid by U.S. corporations. The foregoing relates only to federal income taxation and is a general summary of the federal tax law in effect as of the date of this Statement of Additional Information. 38 FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The financial statements included in the Funds' annual reports to shareholders for the fiscal year ended June 30, 2001 are incorporated by reference in this Statement of Additional Information. OTHER INFORMATION -------------------------------------------------------------------------------- CUSTODIAN; SUB-CUSTODIAN; COUNSEL; ACCOUNTANTS -------------------------------------------------------------------------------- The Northern Trust Company, 50 South LaSalle Street, Chicago, IL 60675 acts as custodian of the Funds' assets and portfolio securities; Dorsey & Whitney LLP, 50 South Sixth Street, Minneapolis, Minnesota 55402, is the General Counsel for the Funds; and KPMG LLP, 4200 Wells Fargo Center, Minneapolis, Minnesota 55402, acts as the Funds' independent accountants. LIMITATION OF DIRECTOR LIABILITY -------------------------------------------------------------------------------- Under Minnesota law, each director of the Funds owes certain fiduciary duties to the Funds and to their shareholders. Minnesota law provides that a director "shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." Fiduciary duties of a director of a Minnesota corporation include, therefore, both a duty of "loyalty" (to act in good faith and act in a manner reasonably believed to be in the best interests of the corporation) and a duty of "care" (to act with the care an ordinarily prudent person in a like position would exercise under similar circumstances). Minnesota law authorizes corporations to eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for breach of the fiduciary duty of "care". Minnesota law does not, however, permit a corporation to eliminate or limit the liability of a director (i) for any breach of the directors' duty of "loyalty" to the corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for authorizing a dividend, stock repurchase or redemption or other distribution in violation of Minnesota law or for violation of certain provisions of Minnesota securities laws or (iv) for any transaction from which the director derived an improper personal benefit. The Articles of Incorporation of the Company limit the liability of directors to the fullest extent permitted by Minnesota statutes, except to the extent that such liability cannot be limited as provided in the Investment Company Act of 1940 (which Act prohibits any provisions which purport to limit the liability of directors arising from such directors' willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their role as directors). Minnesota law does not eliminate the duty of "care" imposed upon a director. It only authorizes a corporation to eliminate monetary liability for violations of that duty. Minnesota law, further, does not permit elimination or limitation of liability of "officers" to the corporation for breach of their duties as officers (including the liability of directors who serve as officers for breach of their duties as officers). Minnesota law does not permit elimination or limitation of the availability of equitable relief, such as injunctive or rescissionary relief. Further, Minnesota law does not permit elimination or limitation of a director's liability under the Securities Act of 1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to what extent the elimination of monetary liability would extend to violations of duties imposed on directors by the Investment Company Act of 1940 and the rules and regulations adopted under such Act. CAPITALIZATION AND VOTING RIGHTS -------------------------------------------------------------------------------- Each of the Funds or the corporate issuer of their shares is organized as a Minnesota corporation. Each of the Funds or its corporate issuer has only one class of shares -- common shares. The Large Cap Growth Fund and the Mid Cap Growth Fund, each have one series of common shares consisting of ten billion shares with a par value of one-tenth of one cent per share. Sit Mutual Funds, Inc., is the corporate issuer of the International Growth Fund, Balanced Fund, Developing Markets Growth Fund, and Small Cap Growth Fund, and Science and Technology Growth Fund. Sit Mutual Funds, Inc. has one trillion shares of common stock authorized with a par value of one tenth of one cent per share. Ten billion of these shares have been designated by the Board of Directors for each of six series: Series A Common Shares represent shares of International Growth Fund; Series B Common Shares represent shares of Balanced Fund; Series C Common Shares represent shares of Developing Markets Growth Fund; Series D Common Shares represent shares of Small Cap 39 Growth Fund; and Series E Common Shares represent shares of Science and Technology Growth Fund. The Board of Directors of Sit Mutual Funds, Inc. is empowered to issue other series of common stock without shareholder approval. The shares of each Fund are nonassessable, can be redeemed or transferred and have no preemptive or conversion rights. All shares have equal, noncumulative voting rights that means that the holders of more than 50% of the shares voting for the election of Directors can elect all of the Directors if they choose to do so. A shareholder is entitled to one vote for each full share (and a fractional vote for each fractional share) then registered in his/her name on the books of each Fund. The shares of each Fund are of equal value and each share is entitled to a pro rata portion of the income dividends and any capital gain distributions. The Funds are not required under Minnesota law to hold annual or periodically scheduled meetings of shareholders. Minnesota corporation law provides for the Board of Directors to convene shareholder meetings when it deems appropriate. However, the Funds intend to hold meetings of shareholders annually. In addition, if a regular meeting of shareholders has not been held during the immediately preceding fifteen months, Minnesota law allows a shareholder or shareholders holding three percent or more of the voting shares of the Funds to demand a regular meeting of shareholders by written notice of demand given to the chief executive officer or the chief financial officer of the Funds. Ninety days after receipt of the demand, a regular meeting of shareholders must be held at the expense of the Funds. Additionally, the Investment Company Act of 1940 Act requires shareholder votes for all amendments to fundamental investment policies and restrictions and for all investment advisory contracts and amendments thereto. 40 APPENDIX A BOND AND COMMERCIAL PAPER RATINGS BOND RATINGS MOODY'S INVESTORS SERVICE, INC. ------------------------------- Aaa Judged to be the best quality, carry the smallest degree of investment risk Aa Judged to be of high quality by all standards A Possess many favorable investment attributes and are to be considered as higher medium grade obligations Baa Medium grade obligations. Lack outstanding investment characteristics. Ba Judged to have speculative elements. Protection of interest and principal payments may be very moderate. B Generally lack characteristics of a desirable investment. Assurance of interest and principal payments over any long period of time may be small. Caa May be present elements of danger with respect to principal or interest or may be in default Ca Represent obligations which are speculative in a high degree. Often in default. C Lowest class of bonds and issued regarded as having extremely poor prospects of attaining any real investment standing. Moody's also applies numerical indicators, 1, 2, and 3, to rating categories Aa through Ba. The modifier 1 indicates that the security is in the higher end of the rating category; the modifier 2 indicates a mid-range ranking; and 3 indicates a ranking toward the lower end of the category. STANDARD & POOR'S ----------------- AAA Highest grade obligations and possess the ultimate degree of protection as to principal and interest AA Also qualify as high grade obligations, and in the majority of instances differ from AAA issues only in small degree A Regarded as upper medium grade, have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions, interest and principal are regarded as safe BBB Considered investment grade with adequate capacity to pay interest and repay principal. BB Judged to be speculative with some inadequacy to meet timely interest and principal payments. B Has greater vulnerability to default than other speculative grade securities. Adverse economic conditions will likely impair capacity or willingness to pay interest and principal. CCC Has a vulnerability to default and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. CC Applied to debt subordinated to senior debt C Applied to debt subordinated to senior debt that is assigned an actual or implied CCC debt rating Standard & Poor's applies indicators "+", no character, and "-" to the above rating categories AA through BB. The indicators show relative standing within the major rating categories. FITCH INC. ---------- AAA Highest credit quality with exceptional ability to pay interest and repay principal AA Investment grade and very high credit quality ability to pay interest and repay principal is very strong, although not quite as strong as AAA A Investment grade with high credit quality. Ability to pay interest and repay principal is strong. BBB Investment grade and has satisfactory credit quality. Adequate ability to pay interest and repay principal. BB Considered speculative. Ability to pay interest and repay principal may be affected over time by adverse economic changes. B Considered highly speculative. Currently meeting interest and principal obligations, but probability of continued payment reflects limited margin of safety. CCC Identifiable characteristics which if not remedied may lead to default. Ability to meet obligations requires an advantageous business and economic environment. CC Minimally protected bonds. Default in payment of interest and/or principal seems probable over time. C Imminent default in payment of interest or principal +and - indicators indicate the relative position within the rating category, but are not used in AAA category. 41 COMMERCIAL PAPER RATINGS MOODY'S ------- Commercial paper rated "Prime" carries the smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote relative strength within this highest classification. STANDARD & POOR'S ----------------- The rating A-1 is the highest commercial paper rating assigned by Standard & Poor's. The modifier "+" indicates that the security is in the higher end of this rating category. FITCH INC. ---------- F-1+ Exceptionally strong credit quality F-1 Strong credit quality 42 PART C OTHER INFORMATION Item 23. Exhibits Explanatory Notes: This Registration Statement contains the combined Part C for the Sit Large Cap Growth Fund, Inc., Mid Cap Growth Fund, Inc. and Sit Mutual Funds, Inc. (a) Articles of Incorporation 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 3 to the Fund's Registration Statement.) (b) Bylaws 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 10 to the Fund's Registration Statement.) (c) Instruments Defining Rights of Security Holders Not applicable. (d) Investment Management Agreement 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 20 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 2 to the Fund's Registration Statement.) (d.1) Sub-Advisory Agreement 1. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 2 to the Fund's Registration Statement.) (e) Underwriting and Distribution Agreement 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 17 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 17 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 6 to the Fund's Registration Statement.) (f) Bonus or Profit Sharing Contracts Not applicable. (g) Custodian Agreement 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 23 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 23 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Amendment Filed Herewith.) (h.1) Transfer Agency and Services Agreement 1. Sit Large Cap Growth Fund, Inc. (Amendment Filed Herewith.) 2. Sit Mid Cap Growth Fund, Inc. (Amendment Filed Herewith.) 3. Sit Mutual Funds, Inc. (Amendment Filed Herewith.) (h.2) Accounting Services Agreement 1. Sit Large Cap Growth Fund, Inc. (Amendment Filed Herewith.) 2. Sit Mid Cap Growth Fund, Inc. (Amendment Filed Herewith.) 3. Sit Mutual Funds, Inc. (Amendment Filed Herewith.) (i) Opinions and Consents of Dorsey & Whitney 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 13 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 13 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's original Registration Statement.) (j) Consent of KPMG LLP 1. Sit Large Cap Growth Fund, Inc. (Filed herewith.) 2. Sit Mid Cap Growth Fund, Inc. (Filed herewith.) 3. Sit Mutual Funds, Inc. (Filed herewith.) (k) Omitted Financial Statements Not applicable. (l) Letter of Investment Intent 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 14 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 14 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 2 to the Fund's original Registration Statement.) (m) Rule 12b-1 Plan Not applicable. C-2 (n) Rule 18f-3 Plan Not applicable. (o) Reserved. (p) Codes of Ethics 1. Sit Large Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 24 to the Fund's Registration Statement.) 2. Sit Mid Cap Growth Fund, Inc. (Incorporated by reference to Post-Effective Amendment No. 24 to the Fund's Registration Statement.) 3. Sit Mutual Funds, Inc. (Incorporated by reference to Post-Effective Amendment No. 18 to the Fund's Registration Statement.) Item 24. Persons Controlled by or Under Common Control with Registrant See the section of the Prospectus entitled "Investment Adviser" and "Investment Sub-Adviser" and the section of the Statement of Additional Information entitled "Investment Adviser." Item 25. Indemnification Each Registrant's Articles of Incorporation and Bylaws provide that the Registrant shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent as permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended; provided, however, that no such indemnification may be made if it would be in violation of Section 17(h) of the Investment Company Act of 1940, as now enacted or hereinafter amended, and any rules, regulations or releases promulgated thereunder. Each Registrant may indemnify its officers and directors and other "persons" acting in an "official capacity" (as such terms are defined in Section 302A.521) pursuant to a determination by the board of directors or shareholders of the Registrant as set forth in Section 302A.521, by special legal counsel selected by the board or a committee thereof for the purpose of making such a determination, or by a Minnesota court upon application of the person seeking indemnification. If a director is seeking indemnification for conduct in the capacity of director or officer of a Registrant, then such director generally may not be counted for the purpose of determining either the presence of a quorum or such director's eligibility to be indemnified. In any case, indemnification is proper only if the eligibility determining body decides that the person seeking indemnification: (a) has not received indemnification for the same conduct from any other party or organization; (b) acted in good faith; (c) received no improper personal benefit; (d) in the case of criminal proceedings, had no reasonable cause to believe the conduct was unlawful; (e) reasonably believed that the conduct was in the best interest of a Registrant, or in certain contexts, was not opposed to the best interest of a Registrant; and (f) had not otherwise engaged in conduct which precludes indemnification under either Minnesota or Federal law (including, but not limited to, conduct constituting willful misfeasance, bad faith, gross negligence, or reckless disregard of duties as set forth in Section 17(h) and (i) of the Investment Company Act of 1940). If a person is made or threatened to be made a party to a proceeding, the person is entitled, upon written request to a Registrant, to payment or reimbursement by a Registrant of reasonable expenses, including attorneys' fees and disbursements, incurred by the person in advance of the final disposition of the proceeding, (a) upon receipt by a Registrant of a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in Section 302A.521 have been satisfied and a written undertaking by the person to repay all amounts so paid or C-3 reimbursed by the Registrant, if it is ultimately determined that the criteria for indemnification have not been satisfied, and (b) after a determination that the facts then known to those making the determination would not preclude indemnification under Section 302A.521. The written undertaking required by clause (a) is an unlimited general obligation of the person making it, but need not be secured and shall be accepted without reference to financial ability to make the repayment. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of a Registrant pursuant to the foregoing provisions, or otherwise, each Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a Registrant of expenses incurred or paid by a director, officer or controlling person of such Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless, in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Each Registrant undertakes to comply with the indemnification requirements of Investment Company Release 7221 (June 9, 1972) and Investment Company Release 11330 (September 2, 1980). Item 26. Business and other Connections of Investment Adviser Sit Investment Associates, Inc. (the "Adviser"), serves as the investment adviser. Sit/Kim International Investment Associates, Inc. (the "Sub-Adviser") serves as the Sub-Adviser of the Series A and Series C of Sit Mutual Funds, Inc. Below is a list of the officers and directors of the Adviser and the Sub-Adviser and their business/employment during the past two years. Business and Employment During Past Two Years; Name Principal Business Address ---- -------------------------------------------------- Eugene C. Sit Chairman, CEO, and CIO of the Adviser; Chairman, CEO and CIO of the Sub-Adviser; Director of SIA Securities Corp. (the "Distributor"); Chairman of the Board of Directors of all Sit Mutual Funds Peter L. Mitchelson President and Chief Strategist, and Director of the Adviser; Director and Executive Vice President of the Sub-Adviser; Senior Portfolio Manager of the Sit Large Cap Growth Fund; Vice Chairman & Director of all Sit Mutual Funds Roger J. Sit Executive Vice President - Research & Investment Management of the Adviser; Deputy CIO and President of the Sub-Adviser Frederick Adler Director of the Adviser; Of Counsel, Fulbright & Jaworski 666 5th Avenue New York, NY 10103 Norman Bud Grossman Director of the Adviser; President, Cogel Management; 4670 Wells Fargo Center Minneapolis MN 55402 William E. Frenzel Advisory Director of the Adviser; Director of Sit Mutual Funds; Director of the Sub-Adviser; Senior Visiting Scholar at the Brookings Institution 1775 Massachusetts Avenue N.W. Washington, D.C. 20036 C-4 Business and Employment During Past Two Years; Name Principal Business Address ---- -------------------------------------------------- Charles W. Battey Director of the Sub-Adviser 7500 West 110th Street Overland Park, KS 66210 David L. Redo Director of the Sub-Adviser; Managing Director of Fremont Investment Advisors, Inc. 333 Market Street, Suite 2600 San Francisco, CA 94105 Michael C. Brilley Senior Vice President and Senior Fixed Income Officer of the Adviser; Director and Senior Vice President of Sit U.S. Government Securities Fund, Inc., Sit Money Market Fund, Inc., and Sit Mutual Funds II, Inc. and Sit Balanced Fund Debra A. Sit Vice President - Bond Investments of the Adviser; Assistant Treasurer of the Sub-Adviser; Vice President - Investments of Sit U.S. Government Securities Fund, Inc., Sit Money Market Fund, Inc., and Sit Mutual Funds II, Inc. Ronald D. Sit Vice President - Research and Investment Management of the Adviser Erik S. Anderson Vice President - Research and Investment Management of the Adviser John T. Groton, Jr. Vice President - Research and Investment Management of the Adviser Kent L. Johnson Vice President - Research and Investment Management of the Adviser Robert W. Sit Vice President - Research and Investment Management of the Adviser Jon A. Loth Vice President - Research and Investment Management of the Adviser Paul E. Rasmussen Vice President, Secretary and Controller and Chief Compliance Officer of the Adviser and the Sub-Adviser; Vice President and Treasurer of all Sit Mutual Funds David A. Brown Vice President - Client Relations Marketing of the Adviser Carla J. Rose Vice President - Administration & Deputy Controller of the Adviser Debra K. Beaudet Vice President - Staff Operations of the Adviser Item 27. Principal Underwriters The Distributor for each Registrant is SIA Securities Corp., 4600 Wells Fargo Center, Minneapolis, MN 55402, an affiliate of the Adviser. The Distributor distributes only shares of each Registrant. Below is a list of the officers and directors of the Distributor and their business/employment during the past two years: Business and Employment During Past Two Years;\ Name Principal Business Address ---- ------------------------------------------------- Eugene C. Sit Chairman, CEO and CIO of the Adviser; Chairman, CEO and CIO of the Sub-Adviser; Director of the Distributor; Chairman of the Board of Directors of all Sit Mutual Funds Peter L. Mitchelson President and Chief Strategist, and Director of the Adviser; Director and Executive Vice President of the Sub-Adviser; Senior Portfolio Manager of the Sit Large Cap Growth Fund; Director of the Distributor; Vice Chairman & Director of all Sit Mutual Funds Paul E. Rasmussen Vice President, Secretary , Controller and Chief Compliance Officer for the Adviser and Sub-Adviser; President and Treasurer of the Distributor; Vice President & Treasurer of all Sit Mutual Funds C-5 Item 28. Location of Accounts and Records The Custodian for each Registrant is The Northern Trust Company, 50 South LaSalle Street, Chicago, IL 60675. The Transfer Agent for each Registrant is PFPC, Inc., 4400 Computer Drive, Westboro, MA 01581. Other books and records are maintained by the Adviser, which is located at 4600 Wells Fargo Center, Minneapolis, MN 55402 and the Sub-Adviser, which is located at the same address. Item 29. Management Services Not applicable. Item 30. Undertakings Not applicable. C-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has caused this Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on the 26th day of October 2001. SIT LARGE CAP GROWTH FUND, INC. (Registrant) By /s/ Eugene C. Sit -------------------------------- Eugene C. Sit, Chairman Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registrant's Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature and Title ------------------- /s/ Eugene C. Sit Dated: October 26, 2001 -------------------------------------------- Eugene C. Sit Chairman (Principal Executive Officer and Director) /s/ Paul E. Rasmussen Dated: October 26, 2001 -------------------------------------------- Paul E. Rasmussen, Treasurer (Principal Financial Officer and Accounting Officer) William E. Frenzel, Director* John E. Hulse, Director* Sidney L. Jones, Director* Peter L. Mitchelson, Director* Donald W. Phillips, Director* *By /s/ Eugene C. Sit Dated: October 26, 2001 ---------------------------------------- Eugene C. Sit, Attorney-in-fact (Pursuant to Powers of Attorney filed previously with the Commission.) C-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has caused this Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on the 26th day of October 2001. SIT MID CAP GROWTH FUND, INC. (Registrant) By /s/ Eugene C. Sit -------------------------------- Eugene C. Sit, Chairman Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registrant's Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature and Title ------------------- /s/ Eugene C. Sit Dated: October 26, 2001 -------------------------------------------- Eugene C. Sit, Chairman (Principal Executive Officer and Director) /s/ Paul E. Rasmussen Dated: October 26, 2001 -------------------------------------------- Paul E. Rasmussen, Treasurer (Principal Financial Officer and Accounting Officer) William E. Frenzel, Director* John E. Hulse, Director* Sidney L. Jones, Director* Peter L. Mitchelson, Director* Donald W. Phillips, Director* *By /s/ Eugene C. Sit Dated: October 26, 2001 ---------------------------------------- Eugene C. Sit, Attorney-in-fact (Pursuant to Powers of Attorney filed previously with the Commission.) C-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has caused this Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on the 26th day of October 2001. SIT MUTUAL FUNDS, INC. (Registrant) By /s/ Eugene C. Sit -------------------------------- Eugene C. Sit, Chairman Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registrant's Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature and Title ------------------- /s/ Eugene C. Sit Dated: October 26, 2001 -------------------------------------------- Eugene C. Sit, Chairman (Principal Executive Officer and Director) /s/Paul E. Rasmussen Dated: October 26, 2001 -------------------------------------------- Paul E. Rasmussen, Treasurer (Principal Financial Officer and Accounting Officer) William E. Frenzel, Director* John E. Hulse, Director* Sidney L. Jones, Director* Peter L. Mitchelson, Director* Donald W. Phillips, Director* *By /s/ Eugene C. Sit Dated: October 26, 2001 ---------------------------------------- Eugene C. Sit, Attorney-in-fact (Pursuant to Powers of Attorney filed previously with the Commission.) C-9 REGISTRATION STATEMENT ON FORM N-1A EXHIBIT INDEX EXHIBIT NO. NAME OF EXHIBIT PAGE NO. ----------- --------------- -------- (g) Amendment to Custodian Agreement C-11 (Registrant Sit Mutual Funds, Inc. only) (h.1.) Amendment to Transfer Agency and Services Agreement C-15 (Combined Amendment for each Registrant) (h.2.) Amendment to Accounting Services Agreement C-29 (Combined Amendment for each Registrant) (j) Consent of Auditor C-36 (Combined Consent for each Registrant) C-10 EX-99.(G) 4 sit014229_ex-g.txt AMENDMENT TO CUSTODIAN AGREEMENT EXHIBIT (g) Amendment to Custodian Agreement SECOND AMENDMENT TO CUSTODY AGREEMENT This instrument dated July 1, 2001 is a Second Amendment to that certain Custody Agreement between Sit Mutual Funds, Inc., a corporation organized under the laws of the State of Minnesota (the "Fund") and The Northern Trust Company (the "Custodian") dated as of July 1, 1999 and amended on July 1, 1999 (the "Custody Agreement"). WHEREAS, the parties desire to amend the Custody Agreement to take into account Rule 17f-7 under the Investment Company Act of 1940. NOW THEREFORE, the parties agree that the Agreement shall be amended as follows: 1. The following definition shall be added to Section 1 of the Custody Agreement: "(n) 'Rule 17f-7' shall mean Rule 17f-7 under the 1940 Act." 2. The following shall replace the definition of "Sub-Custodian" under Section 1(l) of the Custody Agreement: "'Sub-Custodian' shall mean and include (i) any branch of the Custodian, and (ii) any 'eligible foreign custodian,' as that term is defined in Rule 17f-5 under the 1940 Act, approved by the Fund or a Delegate of the Fund in the manner required by Rule 17f-5. For the avoidance of doubt, the term 'Sub-Custodian' shall not include any central securities depository or clearing agency." 3. The following shall replace Sections 3, 3A and 4 of the Custody Agreement: "3. Appointment and Removal of Sub-Custodians. (a) The Custodian may appoint one or more Sub-Custodians to act as sub-custodian or sub-custodians of Securities and moneys at any time held in any Portfolio, upon the terms and conditions specified in this Agreement. The Custodian shall oversee the maintenance by any Sub-Custodian of any Securities or moneys of any Portfolio. (b) The Agreement between the Custodian and each Sub-Custodian described in clause (ii) of Section 1(l) and acting hereunder shall contain any provisions necessary to comply with Rule 17f-5 under the 1940 Act. (c) Prior to the Custodian's use of any Sub-Custodian described in clause (ii) of Paragraph 1(l), the Fund or a Delegate of the Fund must approve such Sub-Custodian in the manner required by Rule 17f-5 and provide the Custodian with satisfactory evidence of such approval. (d) The Custodian shall promptly take such steps as may be required to remove any Sub-Custodian that has ceased to be an "eligible foreign custodian" or has otherwise ceased to meet the requirements under Rule 17f-5. If the Custodian intends to remove any Sub-Custodian previously approved by the C-11 Fund or a Delegate of the Fund pursuant to paragraph 3(c), and the Custodian proposes to replace such Sub-Custodian with a Sub-Custodian that has not yet been approved by the Fund or a Delegate of the Fund, it will so notify the Fund or a Delegate of the Fund and provide it with information reasonably necessary to determine such proposed Sub-Custodian's eligibility under Rule 17f-5, including a copy of the proposed agreement with such Sub-Custodian. The Fund shall at the meeting of the Board of Directors next following receipt of such notice and information, or a Delegate of the Fund shall promptly after receipt of such notice and information, determine whether to approve the proposed Sub-Custodian and will promptly thereafter give written notice of the approval or disapproval of the proposed action. (e) The Custodian hereby represents to the Fund that in its opinion, after due inquiry, the established procedures to be followed by each Sub-Custodian in connection with the safekeeping of property of a Portfolio pursuant to this Agreement afford reasonable care for the safekeeping of such property based on the standards applicable in the relevant market. 3A. Delegation of Foreign Custody Management. (a) The Fund hereby delegates to Custodian the role and responsibilities of foreign custody manager set forth in subparagraph (b) below of this Section 3A, in accordance with Rule 17f-5 with respect to foreign custody arrangements for the Fund's existing and future investment portfolios, except that the Custodian shall not have such responsibility with respect to central depositories and clearing agencies or with respect to custody arrangements in the countries listed on Schedule I, attached hereto, as that Schedule may be amended from time to time by notice to the Fund. (b) With respect to each arrangement with any Sub-custodian regarding the assets of any investment portfolio of the Fund for which Custodian has responsibility under this Section 3A (an "Eligible Foreign Custodian"), Custodian shall: (i) determine that the Fund's assets will be subject to reasonable care, based on the standards applicable to custodians in the relevant market, if maintained with the Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets including without limitation the factors set forth in Rule 17f-5(c); (ii) determine that the written contract with such Eligible Foreign Custodian governing the foreign custody arrangements complies with the requirements of Rule 17f-5 and will provide reasonable care for the Fund's assets; (iii) establish a system to monitor the appropriateness of maintaining the Fund's assets with such Eligible Foreign Custodian and the contract governing the Fund's foreign custody arrangements; (iv) provide to the Fund's Board of Directors, at least annually, written reports notifying the Board of the placement of the Fund's assets with a particular Eligible Foreign Custodian and periodic reports of any material changes to the Fund's foreign custodian arrangements; and (v) withdraw the Fund's assets from any Eligible Foreign Custodian as soon as reasonably practicable, if the foreign custody arrangement no longer meets the requirement of Rule 17f-5. 4. Use of Sub-Custodians and Securities Depositories. With respect to property of a Portfolio which is maintained by the Custodian in the custody of a Sub-Custodian pursuant to Section 3: (a) The Custodian will identify on its books as belonging to the particular Portfolio any property held by such Sub-Custodian. C-12 (b) In the event that a Sub-Custodian permits any of the Securities placed in its care to be held in an Eligible Securities Depository, such Sub-Custodian will be required by its agreement with the Custodian to identify on its books such Securities as being held for the account of the Custodian as a custodian for its customers. (c) Any Securities held by a Sub-Custodian will be subject only to the instructions of the Custodian or its agents; and any Securities held in an Eligible Securities Depository for the account of a Sub-Custodian will be subject only to the instructions of such Sub-Custodian. (d) The Custodian will only deposit property of a Portfolio in an account with a Sub-Custodian which includes exclusively the assets held by the Custodian for its customers, and will cause such account to be designated by such Sub-Custodian as a special custody account for the exclusive benefit of customers of the Custodian. (e) Before any Securities are placed in an Eligible Securities Depository, the Custodian shall provide the Fund's Board of Directors with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depository. (f) The Custodian or its agent shall continue to monitor the custody risks associated with maintaining the Securities with an Eligible Securities Depository and shall promptly notify the Fund's Board of Directors of any material changes in said risks." 5. The following shall replace Sections 16(b)(1) and 16(b)(2) of the Custody Agreement: "1. The Custodian will use reasonable care, prudence and diligence with respect to its obligations under this Agreement and the safekeeping of property of the Portfolios. The Custodian shall be liable to, and shall indemnify and hold harmless the Fund from and against any loss which shall occur as the result of the failure of the Custodian or a Sub-Custodian to exercise reasonable care, prudence and diligence with respect to their respective obligations under this Agreement and the safekeeping of such property. The determination of whether the Custodian or Sub-Custodian has exercised reasonable care, prudence and diligence in connection with their obligations under this Agreement shall be made in light of prevailing standards applicable to professional custodians in the jurisdiction in which such custodial services are performed. In the event of any loss to the Fund by reason of the failure of the Custodian or a Sub-Custodian to exercise reasonable care, prudence and diligence, the Custodian shall be liable to the Fund only to the extent of the Fund's direct damages and expenses, which damages, for purposes of property only, shall be determined based on the market value of the property which is the subject of the loss at the date of discovery of such loss and without reference to any special condition or circumstances. 2. The Custodian will not be responsible for any act, omission, or default of, or for the solvency of, any central securities depository or clearing agency." 6. The following shall replace Section 16(h): "(h) Indemnification. The Fund agrees to indemnify and hold the Custodian harmless from all loss, cost, taxes, charges, assessments, claims, and liabilities (including, without limitation, liabilities arising under the Securities Act of 1933, the Securities Exchange Act of 1934 and the 1940 Act and state or foreign securities laws) and expenses (including reasonable attorneys fees and disbursements) arising directly or indirectly from any action taken or omitted by the Custodian (i) at the request or on the direction of or in reliance on the advice of the Fund or in reasonable reliance upon the Prospectus or (ii) upon an Instruction; provided, that the foregoing indemnity shall not apply to any loss, cost, tax, charge, C-13 assessment, claim, liability or expense to the extent the same is attributable to the Custodian's or any Sub-Custodian's negligence, willful misconduct, bad faith or reckless disregard of duties and obligations under this Agreement or any other agreement relating to the custody of Fund property." In all other respects the Custody Agreement shall remain in full force and effect as originally written. IN WITNESS WHEREOF, the parties have executed this First Amendment, intending it to be effective as of the date written above. SIT MUTUAL FUNDS, INC. By: /s/ Paul E. Rasmussen ---------------------------------------- Name: Paul E. Rasmussen -------------------------------------- Title: Vice President ------------------------------------- THE NORTHERN TRUST COMPANY By: /s/ Michael J. Lies ---------------------------------------- Name: Michael J. Lies -------------------------------------- Title: Vice President ------------------------------------- C-14 EX-99.(H.1) 5 sit014229_ex-h1.txt AMENDMENT TO TRANSFER AGENCY AND SERVICES AGRMT EXHIBIT (h.1) Amendment to Transfer Agency and Services Agreement AMENDMENT THIS AMENDMENT, dated as of this 1st day of January, 2001 is made to the various terms of the Agreements (the "Agreement[s]") described in Schedule 1 of this Amendment between each of the Funds executing this Amendment (hereafter individually and collectively referred to as the "Fund" or the "Company") and FIRST DATA INVESTOR SERVICES GROUP, INC. (n/k/a PFPC Inc.)("PFPC"). WITNESSETH WHEREAS, the Fund and PFPC desire to amend the Agreement[s]. NOW THEREFORE, the Fund and PFPC agree that as of the date first referenced above, the Agreement[s] shall be amended as follows: 1. All references in the Agreement[s] to "First Data Investor Services Group, Inc." and "FDISG" are hereby deleted and replaced with "PFPC Inc." and "PFPC" respectively. 2. The Transfer Agency and Services Agreement[s]. (a) Article 13.1 Term and Termination is modified by deleting from the first sentence thereof the phrase " for a period of five (5) years" and inserting in its place the phrase "in effect through December 31, 2003". (b) Schedule C "FEE SCHEDULE" is hereby deleted and replaced with the attached revised Schedule C. (c) Schedule D "OUT-OF-POCKET EXPENSES" is hereby deleted in its entirety and replaced with the attached revised Schedule D. (d) Exhibit 1 "Sit Mutual Funds, Inc. List of Portfolios" is hereby deleted in its entirety and replaced with the attached revised Exhibit 1. 3. Software and Support Agreement. (a) The Agreement is hereby amended by deleting the phrase "4600 Norwest Center" from the third sentence of the Agreement and inserting in its place the phrase "Suite 4600, 90 South Seventh Street". (b) Article 2.1 Initial Term and Renewal is modified by deleting from the first sentence thereof the phrase "in force for thirty-six (36) months" and inserting in its place the phrase "in effect through December 31, 2003". (c) Exhibit C "Prices and Payment Software Fees" is hereby deleted in its entirety and replaced with the attached Exhibit C. (d) Schedule 1 "Sit Mutual Funds, Inc. List of Funds" is hereby deleted in its entirety and replaced with the attached revised Schedule 1. 4. Disaster Backup Services Agreement. (a) Article 8.1 Term is hereby amended by deleting the phrase "for a period of (5) five years" and inserting in its place "in effect through December 31, 2003". C-15 (b) Article 12 Notice is hereby amended by deleting and revising the address of the Company to read as follows: "Sit Mutual Funds Suite 4600 90 South Seventh Street Minneapolis, MN 55402-4130 Attention: Mr. Eugene C. Sit" 5. Print/Mail Services Agreement. (a) The Agreement is hereby amended by deleting the phrase "4600 Norwest Center" from the third sentence of the Agreement and inserting in its place the phrase "Suite 4600, 90 South Seventh Street". (b) Section 6(a) Term and Termination is hereby amended by deleting the phrase "for a period of three years" and inserting in its place "in effect through December 31, 2003". (c) Section 15 Notices is hereby amended by deleting and revising the address of the Company to read as follows: "Sit Mutual Funds Suite 4600 90 South Seventh Street Minneapolis, MN 55402-4130 Attention: Mr. Eugene C. Sit" (d) Schedule D "PRICING" is hereby deleted and replaced with the attached Schedule D. (e) Exhibit 1 "Sit Mutual Funds, Inc. List of Funds" is hereby deleted in its entirety and replaced with the attached revised Exhibit 1. The Agreement[s], as amended by this Amendment, ("Modified Agreement[s]") constitutes the entire agreement between the parties with respect to the subject matter hereof. The Modified Agreement[s] supersedes all prior and contemporaneous agreements between the parties in connection with the subject matter hereof. No officer, employee, servant or other agent of either party is authorized to make any representation, warranty, or other promises not expressly contained herein with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers, as of the day and year first above written. PFPC INC. SIT LARGE CAP GROWTH FUND, INC. (f/k/a First Data Investor Services Group) By: /s/ Michael Denofrio By: /s/ Shelley H. Shutes -------------------------------- -------------------------------- Title: Executive Vice President Title: Vice President ----------------------------- ----------------------------- C-16 SIT MID CAP GROWTH FUND, INC. SIT MONEY MARKET FUND, INC. By: /s/ Shelley H. Shutes By: /s/ Shelley H. Shutes -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT MUTUAL FUNDS, INC. SIT MUTUAL FUNDS II, INC. By: /s/ Shelley H. Shutes By: /s/ Shelley H. Shutes -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT U.S. GOVERNMENT SECURITIES FUND, INC. By: /s/ Shelley H. Shutes By: /s/ Shelley H. Shutes -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- C-17 Schedule 1 Transfer Agency and Services Agreement[s] dated December 31, 1995 Software and Support Agreement dated December 31, 1995 Disaster Backup Services Agreement dated June 1, 1997 Print/Mail Services Agreement dated December 31, 1995 C-18 EXHIBIT C To the Software and Support Services Agreement PRICES AND PAYMENT SOFTWARE FEES Revised as of 1/1/01 ------ 1. General 1.1 PFPC shall charge a service fee equal to the lesser of (i) one and one half percent (1-1/2%) per month or (ii) the highest interest rate legally permitted on any unpaid amounts, unless such amounts are ultimately determined not due in accordance with the Payment Dispute Procedure. Client shall also reimburse PFPC for all reasonable expense to collect delinquent amounts, including reasonable attorneys' fees and court costs. 1.2 PFPC shall charge Client for all travel and living expenses. Client shall pay PFPC monthly for any expenses which PFPC incurs for forms, postage, package delivery and other similar items, while performing services under the Agreement. Client shall also pay amounts arising from, among other events, changes and upgrades to Equipment and Third Party Software, and costs associated with reproducing Third Party Vendor documentation. 1.3 PFPC may adjust any annual or monthly fees (a) once per calendar year, upon thirty (30) days prior written notice, in an amount not to exceed the cumulative percentage increase in the Consumer Price Index for All Urban Consumers (CPI-U) U.S. City Average, All Items (unadjusted) - (1982-84 = 100), published by the U.S. Department of Labor since the last such adjustment in Client's monthly fees (or the Effective Date absent a prior such adjustment); and (b) by any price increase from Third Party Vendors or PFPC's suppliers of other product or service, effective on the date of the suppliers' price increase. 2. Software Fees Software Fee: $10,000.00 per year Software Fee shall be paid as follows: $833.00 total per month for 12 months 3. Support Fees Support Fee: $650 per workstation per year Support Fee shall be paid as follows: $541.66 total per month for 12 months for 10 workstations C-19 Schedule C To The Transfer Agency and Services Agreement[s] FEE SCHEDULE ------------ Revised As of 1/1/01 ------ 1. STANDARD TRANSFER AGENCY SERVICES a) ANNUAL ACCOUNT FEES: The following fees will be calculated and payable monthly: Active account $15.75 per fund position per annum Inactive account $ 2.50 per fund position per annum Fees are billed monthly based on 1/12th of the annual fee. An inactive account is defined as having a zero balance during the entire month with no dividend payable. Inactive accounts are purged annually. b) MONTHLY MINIMUM FEE: $ 2,000 per month, per cusip, excluding out-of-pocket expenses and transaction charges. c) TRANSACTION CHARGES: Retirement Plan processing: $15.00 per fund position, per annum* $15.00 per distribution, per closed account* *May be charged to the shareholder or paid by the fund. d) SHAREHOLDER EXPENSES (WHICH MAY BE INCURRED BY THE FUND): Billed as incurred Shareholder expenses include but are not limited to: exchange fees between funds; request for account transcript; returned checks; lost certificate bonding; overnight delivery as requested by the shareholder; wire fee for disbursement if requested by the shareholder, etc. e) MISCELLANEOUS CHARGES (WHICH MAY BE INCURRED BY THE FUND): Billed as incurred The Fund shall be charged for the following products and services as applicable, ad hoc reports, ad hoc SQL time, banking services, COLD storage, digital recording, microfiche/microfilm production, magnetic media tapes and freight, and pre-printed stock, including business forms, certificates, envelopes, checks and stationary. In addition, consolidated statement, audio response and development/programming costs will be quoted upon occurrence. 2. IMPRESSNET (RETAIL VERSION): a) Annual Recurring Fee: --------------------------------------------------------------------- NUMBER OF ACCOUNTS * ANNUAL FEE --------------------------------------------------------------------- Less than 20,000 Accounts $10,500 --------------------------------------------------------------------- Between 20,001 and 50,000 Accounts $14,000 --------------------------------------------------------------------- Between 50,001 and 100,000 Accounts $17,500 --------------------------------------------------------------------- Between 100,001 and 500,000 Accounts $21,000 --------------------------------------------------------------------- Between 500,001 and 1,000,000 Accounts $28,000 --------------------------------------------------------------------- Over 1,000,000 Accounts $35,000 --------------------------------------------------------------------- C-20 b) Inquiry and Transaction Fees: The fee for an Account Inquiry is $0.10 per occurrence. For an Account Transaction, the fee is $0.50 per occurrence. These fees are tracked and billed monthly. Inquiry and transaction fees are subject to the following monthly minimums: MONTHLY MINIMUMS: ----------------------------------------------------------------------- TRANSACTION NUMBER OF ACCOUNTS * INQUIRY MINIMUM MINIMUM ----------------------------------------------------------------------- Less than 20,000 Accounts $1,200 $120 ----------------------------------------------------------------------- Between 20,001 and 50,000 Accounts $1,600 $160 ----------------------------------------------------------------------- Between 50,001 and 100,000 Accounts $2,000 $200 ----------------------------------------------------------------------- Between 100,001 and 500,000 Accounts $2,600 $260 ----------------------------------------------------------------------- Between 500,001 and 1,000,000 Accounts $3,200 $320 ----------------------------------------------------------------------- Over 1,000,000 Accounts $4,000 $400 ----------------------------------------------------------------------- * Counted at implementation and then at each subsequent anniversary date from the date of implementation. Annual Fee and Monthly Minimums will be adjusted accordingly. c) Annual Hardware Maintenance Fee: $20,000 PER YEAR d) Impress-Net.com (Back Office): $0.05 PER CLICK e) Other Fees: CUSTOMIZATION FEE: $150 PER HOUR 3. DAZL SERVICES MONTHLY MAINTENANCE FEE: $1,000.00 Includes client and broker dealer access to DAZL Support Group. DAZL BASE TRANSMISSION FEE/RECORD: Price records $0.015 Other records $0.030 (security, distribution, account master, transaction, position) DAZL DIRECT/INTERACTIVE/TRUST/401K/ICI/MGT. CO LEVEL FEE/RECORD: Price records $0.01 Other records $0.01 (security, distribution, account master, transaction, position) ENHANCEMENT FEE: $125.00/hour 4. NSCC: * $0.15 per transaction * $0.10 per same day trade 5. TRAINING: * $125 per hour per resource * Travel & Entertainment is not included in hourly rate C-21 6. VOICE RESPONSE UNIT: * $500 per month maintenance fee * $0.23 per minute * $0.10 per call Customization is available at $150.00 per hour. 7. FUNDED/DEDICATED TEAM/ADHOCS: * Funded team is $150 per hour * Dedicated team is $150,000 per programmer; $100,000 per BSA, and/or $ 80,000 per tester per year PLUS all merit increases, including bonuses * Adhocs are $150 per hour 8. COST BASIS ACCOUNTING: $0.15 per eligible account per month 9. GENERAL: a) PFPC may charge a service fee equal to the lesser of (i) one and one half percent (1 1/2%) per month or (ii) the highest interest rate legally permitted on any unpaid amounts, unless such amounts are ultimately determined not due in accordance with the Payment Dispute Procedure. The Fund shall also reimburse PFPC for all reasonable expenses to collect delinquent amounts, including reasonable attorneys' fees and court costs. b) PFPC may adjust the fees described herein once per calendar year, upon thirty (30) days prior written notice, in an amount not to exceed the cumulative percentage increase in the Consumer Price Index for All Urban Consumers (CIP-U) U.S. City Average, All Items (unadjusted) - (1982-84=100), published by the U.S. Department of Labor since the last such adjustment in Client's monthly fees (or the effective date absent a prior such adjustment). C-22 Schedule D To The Transfer Agency and Services Agreement[s] OUT-OF-POCKET-EXPENSES Out-of-Pocket Expenses will be billed as incurred and include, but are not limited to, postage (direct pass through to the Fund), telephone and telecommunication costs (including all lease, maintenance and line costs), proxy solicitations (including mailings and tabulations), shipping, certified and overnight mail (including related insurance), terminals, communication lines, printers and other equipment and any expenses incurred in connection with such terminals and lines, duplicating services, distribution and redemption check issuance, courier services, Federal Reserve charges for check clearance, overtime (as approved by the Fund), temporary staff (as approved by the Fund), travel and entertainment (as approved by the Fund), record retention (including retrieval and destruction costs, exit fees charged by third party record keeping vendors), third party audit reviews, insurance. The Fund agrees that postage and mailing expenses will be paid on the day of or prior to mailing as agreed with PFPC. In addition, the Fund will promptly reimburse PFPC for any other unscheduled expenses incurred by PFPC whenever the Fund and PFPC mutually agree that such expenses are not otherwise properly borne by PFPC as part of its duties and obligations under the Agreement. C-23 Schedule D To the Print/Mail Services Agreement Pricing 1. PRINT/MAIL SERVICES: TESTING APPLICATION OR DATA REQUIREMENTS: $3.00 / fax to client or Record Keeper WORK ORDER: $15.00 per work order DAILY WORK (CONFIRMS): HAND: $71.00/K with $75.00 minimum (includes 1 insert) $0.07/each additional insert MACHINE: $42.00/K with $50.00 minimum (includes 1 insert) $0.01/each additional insert DAILY CHECKS: HAND: $91.00/K with $100.00 minimum daily (includes 1 insert) $0.08/each additional insert MACHINE: $52.00/K with $75.00 minimum (includes 1 insert) $0.01/each additional insert * There is a $3.00 charge for each 3606 Form sent. STATEMENTS: HAND: $78.00/K with $75.00 minimum (includes 1 insert) $0.08/each additional insert $125.00/K for intelligent inserting MACHINE: $52.00/K with $75.00 minimum (includes 1 insert) $0.01 each additional insert $58.00/K for intelligent inserting PERIODIC CHECKS: HAND: $91.00/K with $100.00 minimum (includes 1 insert) $0.08/each additional insert MACHINE: $52.00/K with $100.00 minimum (includes 1 insert) $0.01/each additional insert 12B1/DEALER COMMISSION CHECKS/STATEMENTS: $0.78/each envelope with $100.00 minimum SPAC REPORTS/GROUP STATEMENTS: $78.00/K with $75.00 minimum LISTBILLS: $0.78 per envelope with $75.00 minimum C-24 PRINTING CHARGES: $0.07 per confirm/statement/page $0.10 per check FOLDING (MACHINE): $18.00/K OFFLINE METERING: $10.00/K FOLDING (HAND): $.12 each PRESORT CHARGE: $0.035 per piece COURIER CHARGE: $15.00 for each on call courier trip/or actual cost for on demand OVERNIGHT CHARGE: $3.50 per package service charge plus Federal Express/Airborne charge INVENTORY STORAGE: $25.00 for each inventory location as of the 15th of the month INVENTORY RECEIPT: $20.00 for each SKU / Shipment HOURLY WORK; SPECIAL PROJECTS, OPENING ENVELOPES, ETC.: $24.00 per hour SPECIAL PULLS: $2.50 per account pull BOXES/ENVELOPES: Shipping boxes $0.85 each Oversized Envelopes $0.45 each FORMS DEVELOPMENT/PROGRAMMING FEE: $150.00/hr SYSTEMS TESTING: $110.00/hr CUTTING CHARGES: $10.00/K 2. GENERAL: a) PFPC may charge a service fee equal to the lesser of (i) one and one half percent (1 1/2%) per month or (ii) the highest interest rate legally permitted on any unpaid amounts, unless such amounts are ultimately determined not due in accordance with the Payment Dispute Procedure. The Fund shall also reimburse PFPC for all reasonable expenses to collect delinquent amounts, including reasonable attorneys' fees and court costs. b) PFPC may adjust the fees described herein once per calendar year, upon thirty (30) days prior written notice, in an amount not to exceed the cumulative percentage increase in the Consumer Price Index for All Urban Consumers (CIP-U) U.S. City Average, All Items (unadjusted) - (1982-84=100), published by the U.S. Department of Labor since the last such adjustment in Client's monthly fees (or the effective date absent a prior such adjustment). C-25 Exhibit 1 To Transfer Agency and Services Agreement dated December 31, 1995 Sit Mutual Funds, Inc. LIST OF PORTFOLIOS Dated as of December 15, 2000 Sit International Growth Fund (series A) Sit Balanced Fund (series B) Sit Developing Markets Growth Fund (series C) Sit Small Cap Growth Fund (series D) Sit Science and Technology Growth Fund (series E) C-26 Schedule 1 To Software and Support Agreement dated December 31, 1995 Sit Mutual Funds - List of Funds Dated as of December 15, 2000 Sit Mid Cap Growth Fund, Inc. Sit Large Cap Growth Fund, Inc. Sit U.S. Government Securities Fund, Inc. Sit Money Market Fund, Inc. Sit Mutual Funds, Inc. Comprised of: Sit International Growth Fund (series A) Sit Balanced Fund (series B) Sit Developing Markets Growth Fund (series C) Sit Small Cap Growth Fund (series D) Sit Science and Technology Growth Fund (series E) Sit Mutual Funds II, Inc. Comprised of: Sit Tax-Free Income Fund (series A) Sit Minnesota Tax-Free Income Fund (series B) Sit Bond Fund (series C) C-27 Exhibit 1 To Print/Mail Services Agreement dated December 31, 1995 Sit Mutual Funds - List of Funds Dated as of December 15, 2000 Sit Mid Cap Growth Fund, Inc. Sit Large Cap Growth Fund, Inc. Sit U.S. Government Securities Fund, Inc. Sit Money Market Fund, Inc. Sit Mutual Funds, Inc. Comprised of: Sit International Growth Fund (series A) Sit Balanced Fund (series B) Sit Developing Markets Growth Fund (series C) Sit Small Cap Growth Fund (series D) Sit Science and Technology Growth Fund (series E) Sit Mutual Funds II, Inc. Comprised of: Sit Tax-Free Income Fund (series A) Sit Minnesota Tax-Free Income Fund (series B) Sit Bond Fund (series C) C-28 EX-99.(H.2) 6 sit014229_ex-h2.txt AMENDMENT TO ACCOUNTING SERVICES AGREEMENT EXHIBIT (h.2) Amendment to Accounting Services Agreement AMENDMENT TO THE ACCOUNTING SERVICES AGREEMENT FOR DATASTATION SERVICES THIS AMENDMENT, dated as of October 1, 2000 is made to the Accounting Services Agreement[s] (the "Agreement[s]") dated April 1, 1996 between each of the Companies executing this Amendment (hereafter individually and collectively referred to as the "Company") and FIRST DATA INVESTOR SERVICES GROUP, INC. (n/k/a PFPC Inc.) ("PFPC"). Recitals WHEREAS, in addition to the services described in the Agreement, the Company desires that PFPC provide the Company's service providers with Internet access to certain fund portfolio data using PFPC DataStation ("DataStation"), all in accordance with the terms of this Amendment; and WHEREAS, the Company and PFPC desire to amend the Agreement to provide for such services and corresponding fees. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, PFPC and the Company, intending to be legally bound hereby, agree as follows. 1. Amendments to Agreement. (a) All references to "First Data Investor Services Group, Inc." and "FDISG" are hereby deleted and replaced with "PFPC Inc." and "PFPC" respectively. (b) The Agreement is hereby amended to add a Section 3(g), which shall read in full as follows: "(g) PFPC DATASTATION ACCESS SERVICES. PFPC shall provide to the Company the DataStation Internet access services as set forth on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time. Persons who are Company "Authorized Persons" to access DataStation are set forth on Exhibit B attached hereto and made a part hereof, as such Exhibit B may be amended from time to time. (c) Exhibit A and Exhibit B are hereby added to the Agreement to read in full as set forth in such Exhibits to this Amendment. 2. Miscellaneous. (a) Except as specifically amended herein, and except as necessary to conform to the intention of the parties hereinabove set forth, the Agreement shall remain unaltered and in full force and effect and is hereby ratified and confirmed. In the event of a conflict between the terms hereof and the Agreement, as to the Internet services, this Amendment shall control. C-29 (b) This Amendment, together with its Exhibits, constitutes the complete understanding and agreement of the parties with respect to the subject matter hereof and supercedes all prior communications with respect thereto. IN WITNESS WHEREOF, the parties hereto have set their hands by their duly authorized representatives as of the year and date first above indicated. PFPC INC. SIT LARGE CAP GROWTH FUND, INC. (f/k/a First Data Investor Services Group) By: Stephen M. Wynne By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Executive Vice President Title: Vice President ----------------------------- ----------------------------- SIT MID CAP GROWTH FUND, INC. SIT MONEY MARKET FUND, INC. By: /s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT MUTUAL FUNDS, INC. SIT MUTUAL FUNDS II, INC. By: /s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT U.S. GOVERNMENT SECURITIES FUND, INC. By: /s/ Paul E. Rasmussen -------------------------------- Title: Vice President ----------------------------- C-30 EXHIBIT A DATASTATION ACCESS SERVICES THIS EXHIBIT A, dated as of October 1, 2000, is Exhibit A to the Accounting Services Agreement[s] dated April 1, 1996, as amended to date (the "Agreement") between each of the Companies executing this Exhibit A (hereafter individually and collectively referred to as the "Company") and PFPC Inc. ("PFPC"). This Exhibit A shall supersede all previous forms of Exhibit A to the Agreement as of the date hereof. 1. PFPC SERVICES (a) Provide Internet access to PFPC DataStation ("DataStation") at www.pfpcdatastation.com (the "Site") for Fund portfolio data otherwise supplied by PFPC to Company service providers via other electronic and manual methods (the "Services"). Types of information to be provided on the Site include: (i) data relating to portfolio securities, (ii) general ledger balances, and (iii) net asset value-related data (NAV and net asset, distribution and yield detail). (b) Supply each of the Authorized Persons specified on Exhibit B as permissible users of Datastation (the "Users") with a logon ID and Password; (c) Provide to Users access to the information listed in (a) above using standard inquiry tools and reports. Users will be able to modify standard inquiries to develop user-defined inquiry tools; however, PFPC will review computer costs for running user-defined inquiries and may assess surcharges for those requiring excessive hardware resources. In addition, costs for developing custom reports or enhancements are not included in the fees set forth below and will be negotiated and billed separately. (d) Utilize a form of encryption that is generally available to the public in the U.S. for standard Internet browsers and establish, monitor and verify firewalls and other security features (commercially reasonable for this type of information and these types of users) and exercise commercially reasonable efforts to attempt to maintain the security and integrity of the Site; and (e) Monitor the telephone lines involved in providing the Services and inform the Company promptly of any malfunctions or service interruptions. 2. DUTIES OF THE COMPANY AND THE USERS (a) The Company shall: (i) Provide and maintain a web browser supporting Secure Sockets Layer 128-bit encryption; and (ii) Keep logon IDs and passwords confidential and notify PFPC immediately in the event that a logon ID or password is lost, stolen or if you have reason to believe that the logon ID and password are being used by an unauthorized person. (b) The Company acknowledges that it and the Users are prohibited from using any Data in any way not authorized by PFPC. The Company further acknowledges that it and the Users are prohibited from using any Data for purposes of updating a security master. The Company agrees that PFPC's suppliers of Data are third-party beneficiaries to this express prohibition and that any such Data supplier may bring suit on its own behalf to enforce this express prohibition. C-31 3. STANDARD OF CARE; LIMITATIONS OF LIABILITY (a) Notwithstanding anything to the contrary contained in the Agreement or this Exhibit A, PFPC shall be liable for direct damages incurred by the Company and which arise out of PFPC's failure to perform its duties and obligations described in this Exhibit A to the extent such damages constitute willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Exhibit A. (b) The Company acknowledges that the Internet is an "open," publicly accessible network and not under the control of any party. PFPC's provision of Services is dependent upon the proper functioning of the Internet and services provided by telecommunications carriers, firewall providers, encryption system developers and others. The Company agrees that PFPC shall not be liable in any respect for the actions or omissions of any third party wrongdoers (i.e., hackers not employed by such party or its affiliates) or of any third parties involved in the Services and shall not be liable in any respect for the selection of any such third party, unless that selection constitutes a breach of PFPC's standard of care above. (c) Without limiting the generality of the foregoing or any other provisions of this Exhibit A or the Agreement, PFPC shall not be liable for delays or failures to perform any of the Services or errors or loss of data occurring by reason of circumstances beyond such party's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrections, war, riots or failure of the mails, transportation, communication or power supply, functions or malfunctions of the Internet or telecommunications services, firewalls, encryption systems or security devices caused by any of the above, or laws or regulations imposed after the date of this Exhibit. 4. FEES FOR DATASTATION SERVICES. As consideration for the performance by PFPC of the Services, the Company will pay the fees set forth below and any additional fees set forth in a separate fee letter or work order as agreed between the parties from time to time: NUMBER OF PORTFOLIOS MONTHLY FEE -------------------- ----------- 1 - 2 $250 3 - 5 $250 + $85 perportfolio over 2 6 - 10 $505 + $65 per portfolio over 5 11 - 15 $830 + $50 per portfolio over 10 16 - 20 $1,080 + $35 per portfolio over 15 over 20 $1,250 + $30 per portfolio over 20 5. DURATION, TERMINATION AND CHANGES TO TERMS. (a) PFPC shall have the right at any time to review and propose changes to the terms and fees described in this Amendment. Such changes will become effective and bind the parties hereto after sixty (60) days from the date PFPC notifies the Company of such changes, unless the Company terminates this Amendment pursuant hereto or the parties agree otherwise at such time. (b) Either party may terminate this Amendment upon sixty (60) days prior written notice to the other. Any outstanding fees must be paid before this Amendment terminates. C-32 6. MISCELLANEOUS. In the event of a conflict between specific terms of this Exhibit A and the Agreement, this Exhibit A shall control as to the Internet Services. PFPC INC. SIT LARGE CAP GROWTH FUND, INC. (f/k/a First Data Investor Services Group) By: /s/ Stephen M. Wynne By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Executive Vice President Title: Vice President ----------------------------- ----------------------------- SIT MID CAP GROWTH FUND, INC. SIT MONEY MARKET FUND, INC. By: :/s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT MUTUAL FUNDS, INC. SIT MUTUAL FUNDS II, INC. By: /s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: /s/ Paul E. Rasmussen ----------------------------- ----------------------------- SIT U.S. GOVERNMENT SECURITIES FUND, INC. By: /s/ Paul E. Rasmussen -------------------------------- Title: /s/ Paul E. Rasmussen ----------------------------- C-33 EXHIBIT B DataStation Authorized Persons THIS EXHIBIT B, dated as of October 1, 2000 is Exhibit B to the Accounting Services Agreement[s] dated April 1, 1996, as amended to date (the "Agreement") between each of the Companies executing this Exhibit B (hereafter individually and collectively referred to as the "Company") and PFPC Inc. ("PFPC"). This Exhibit B shall supersede all previous forms of Exhibit B to the Agreement as of the date hereof. The following individuals shall be Company Authorized Persons to access PFPC DataStation: NAME COMPANY OR FIRM SIGNATURE ---- --------------- --------- Matt Wiebke Sit Investment /s/ Matt Wiebke ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- PFPC INC. SIT LARGE CAP GROWTH FUND, INC. (f/k/a First Data Investor Services Group) By: /s/ Stephen M. Wynne By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Executive Vice President Title: Vice President ----------------------------- ----------------------------- SIT MID CAP GROWTH FUND, INC. SIT MONEY MARKET FUND, INC. By: /s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT MUTUAL FUNDS, INC. SIT MUTUAL FUNDS II, INC. By: /s/ Paul E. Rasmussen By: /s/ Paul E. Rasmussen -------------------------------- -------------------------------- Title: Vice President Title: Vice President ----------------------------- ----------------------------- SIT U.S. GOVERNMENT SECURITIES FUND, INC. By: /s/ Paul E. Rasmussen -------------------------------- Title: Vice President ----------------------------- C-34 EX-99.(J) 7 sit014229_ex-j.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT (j) Consent of Auditor Independent Auditors' Consent The Board of Directors and Shareholders Sit Mutual Funds, Inc. Sit Large Cap Growth Fund, Inc. Sit Mid Cap Growth Fund, Inc. We consent to the use of our report dated August 3, 2001 incorporated herein by reference and to the references to our Firm under the headings "Financial Highlights" in Part A and "Custodian; Sub-Custodian; Counsel; Accountants" in Part B of the Registration Statement. /s/ KPMG LLP KPMG LLP Minneapolis, Minnesota October 12, 2001 C-35