APRIL 21, 1998
as supplemented on May 4, 1998
MONEY MARKET FUNDS
CLASS A AND CLASS B SHARES
TREASURY OBLIGATIONS FUND
GOVERNMENT OBLIGATIONS FUND
PRIME OBLIGATIONS FUND
TAX FREE OBLIGATIONS FUND
FIRST AMERICAN FUNDS, INC.
PROSPECTUS
[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)
<PAGE>
TABLE OF CONTENTS
Summary 2
...................................................
Fees and Expenses 4
...................................................
Financial Highlights 7
...................................................
The Funds 10
...................................................
Investment Objectives and Policies 10
...................................................
Management of the Funds 12
...................................................
Distributor 13
...................................................
Portfolio Transactions 14
...................................................
Investing in the Funds 15
...................................................
Redeeming Shares 19
...................................................
Determining the Price of Shares 21
...................................................
Taxes 21
...................................................
Fund Shares 22
...................................................
Calculation of Performance Data 22
...................................................
Investment Restrictions and Techniques 23
...................................................
Information Concerning Compensation Paid
to U.S. Bank National Association and Other
Affiliates 28
...................................................
<PAGE>
FIRST AMERICAN FUNDS, INC.
CLASS A AND CLASS B
SHARES PROSPECTUS
The shares described in this Prospectus represent interests in First
American Funds, Inc., which consists of mutual funds with four different
investment portfolios and objectives. This Prospectus relates to the Class A
Shares of the following funds (the "Funds"):
* TREASURY OBLIGATIONS FUND
* GOVERNMENT OBLIGATIONS FUND
* PRIME OBLIGATIONS FUND
* TAX FREE OBLIGATIONS FUND
This Prospectus also relates to the Class B Shares of Prime Obligations
Fund.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION OR ANY OF ITS AFFILIATES,
NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated April 21, 1998 as supplemented
on May 4, 1998, for the Funds has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated in its entirety by reference
in this Prospectus. To obtain copies of the Statement of Additional
Information at no charge, or to obtain other information or make inquiries
about the Funds, call (800) 637-2548 or write SEI Investments Distribution
Co., Oaks, Pennsylvania 19456. The SEC maintains a World Wide Web site that
contains reports and information regarding issuers that file electronically
with the SEC. The address of such site is "http://www.sec.gov."
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED
STATES GOVERNMENT, AND THERE IS NO ASSURANCE THAT EACH FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 21, 1998 as supplemented on
May 4, 1998.
<PAGE>
SUMMARY
First American Funds, Inc. ("FAF") is an open-end investment company which
offers shares in several different mutual funds. This Prospectus provides
information with respect to the Class A Shares of the following Funds. It
also relates to the Class B Shares of Prime Obligations Fund.
TREASURY OBLIGATIONS FUND has an objective of seeking to achieve maximum
current income consistent with preservation of capital and maintenance of
liquidity. In seeking to achieve its investment objective, the Fund invests
in United States Treasury obligations maturing within 397 days or less as
determined pursuant to Rule 2a-7 under the Investment Company Act of 1940
(the "1940 Act") and repurchase agreements relating to such securities.
GOVERNMENT OBLIGATIONS FUND has an objective of seeking to achieve maximum
current income to the extent consistent with the preservation of capital and
maintenance of liquidity. In seeking to achieve its investment objective,
the Fund invests exclusively in United States Government securities maturing
within 397 days as determined pursuant to Rule 2a-7 under the 1940 Act and
repurchase agreements relating to such securities.
PRIME OBLIGATIONS FUND has an objective of seeking to achieve maximum
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity. In seeking to achieve its investment
objective, the Fund invests in money market instruments, including
marketable securities issued or guaranteed by the United States Government
or its agencies or instrumentalities, United States dollar-denominated
obligations of banks organized under the laws of the United States or any
state, foreign banks, United States branches of foreign banks, and foreign
branches of United States banks, if such banks have total assets of not less
than $500 million.
TAX FREE OBLIGATIONS FUND has an objective of seeking to achieve maximum
current income exempt from federal income taxes consistent with the
preservation of capital and maintenance of liquidity. In seeking to achieve
its investment objective, the Fund invests at least 80% of its total assets
in municipal obligations, the income from which is exempt from federal
income tax. In addition, the Fund may invest up to 20% of its total assets
in municipal obligations, the income from which is an item of tax preference
for purposes of the federal alternative minimum tax.
INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank") serves as the investment Advisor to each of the Funds through its
First American Asset Management group. See "Management of the Funds."
DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. SEI
Investments Management Corporation (the "Administrator") serves as the
administrator of the Funds. See "Management of the Funds" and
"Distributor."
OFFERING PRICES. Class A Shares of the Funds are sold at net asset value
without any initial or contingent deferred sales charges. Class A Shares of
the Funds are redeemed at net asset value without any additional charge.
Class A Shares of each Fund are subject to a shareholder servicing fee
computed at an annual rate of 0.25% of the average daily net assets of that
class.
<PAGE>
Class B Shares of the Funds are sold at net asset value without any initial
sales charge. If Class B Shares are redeemed within six years after
purchase, they are subject to a contingent deferred sales charge declining
from 5.00% in the first year to zero after six years. Class B Shares of each
Fund are subject to Rule 12b-1 distribution and shareholder servicing fees
computed at an annual rate totaling 1.00% of the average daily net assets of
that class.
MINIMUM INVESTMENT AND SUBSEQUENT INVESTMENTS. The minimum initial
investment is $1,000 ($250 for IRAs) for each Fund. Subsequent investments
must be $100 or more. Regular investment in the Funds is simplified
through the Systematic Investment Program through which monthly purchases
of $100 or more are possible. See "Investing in the Funds -- Minimum
Investment Required" and "-- Systematic Investment Program."
EXCHANGES. Shares of any Fund may be exchanged for the same class of
shares of other funds in the First American family of funds at the shares'
respective net asset values with no additional charge. See "Investing in
the Funds -- Exchange Privilege."
REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, less any applicable contingent deferred sales
charge. Each Fund may, upon 60 days written notice, redeem an account if
the account's net asset value falls below $500. See "Investing in the
Funds" and "Redeeming Shares."
RISKS TO CONSIDER. Like other mutual funds, financial and business
organizations around the world, the Funds could be adversely affected if the
computer system used by the Advisor, the Administrator and other service
providers and entities with computer systems that are linked to Fund records
do not properly process and calculate date-related information and data from
and after January 1, 2000. This is commonly known as the "Year 2000 issue".
The Funds have undertaken a Year 2000 program that is reasonably designed to
assess and monitor the steps being taken by the Funds' service providers to
address the Year 2000 issue with respect to the computer systems they use.
However, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Funds.
SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds
or a shareholder account should be directed to the Distributor by calling
(800) 637-2548, or to the financial institution which holds shares on an
investor's behalf.
<PAGE>
FEES AND EXPENSES
- --------------------------------------------------------------------------------
CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
TREASURY GOVERNMENT PRIME TAX FREE
OBLIGATIONS OBLIGATIONS OBLIGATIONS OBLIGATIONS
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None None None
Maximum sales load imposed on reinvested
dividends None None None None
Maximum contingent deferred sales charge (AS A
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, AS APPLICABLE) None None None None
Redemption fees None None None None
Exchange fees None None None None
- --------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee
waivers)(1) 0.32% 0.33% 0.33% 0.11%
Rule 12b-1 fees 0.25%(2) 0.25%(2) 0.25%(2) 0.25%(2)
Other expenses 0.13%+ 0.18%+ 0.20% 0.38%+
Total fund operating expenses
(after voluntary fee waivers)(1) 0.70% 0.76% 0.78% 0.74%
- --------------------------------------------------------------------------------------------------------------------
EXAMPLE(3)
YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING (i) A 5%
ANNUAL RETURN AND (ii) REDEMPTION AT THE END OF EACH TIME:
1 year $ 7 $ 8 $ 8 $ 8
3 years $22 $24 $25 $24
5 years $39 $42 $43 $41
10 years $87 $94 $97 $92
</TABLE>
+ The other expenses set forth above reflect estimates of current expenses.
(1) THE ADVISOR INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN ABOVE REFLECT THESE WAIVERS AS OF THE DATE OF THIS
PROSPECTUS. THE ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS THROUGH JANUARY 31,
1999 BUT RESERVES THE RIGHT TO TERMINATE ITS WAIVER AT ANY TIME THEREAFTER
IN ITS SOLE DISCRETION. FOR GOVERNMENT OBLIGATIONS FUND AND PRIME
OBLIGATIONS FUND TOTAL FUND OPERATING EXPENSES WILL BE MAINTAINED AT THE
LEVELS SHOWN ABOVE BEGINNING OCTOBER 1, 1998. PRIOR TO THAT DATE, TOTAL FUND
OPERATING EXPENSES AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS
WILL BE MAINTAINED AT 0.70%. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY
FEES FOR THE FUNDS AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS
WOULD BE 0.40%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS
WOULD BE 0.78% FOR TREASURY OBLIGATIONS FUND, 0.83% FOR GOVERNMENT
OBLIGATIONS FUND, 0.85% FOR PRIME OBLIGATIONS FUND AND 1.03% FOR TAX FREE
OBLIGATIONS FUND. "OTHER EXPENSES" INCLUDES AN ADMINISTRATION FEE AND, FOR
TREASURY OBLIGATIONS FUND, GOVERNMENT OBLIGATIONS FUND AND TAX FREE
OBLIGATIONS FUND, IS BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
(2) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE
AS A DISTRIBUTION FEE.
(3) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5, AND 10 YEAR PERIODS IN THE EXAMPLE ABOVE WOULD BE AS FOLLOWS:
TREASURY OBLIGATIONS FUND, $8, $25, $43 AND $97; GOVERNMENT OBLIGATIONS
FUND, $8, $26, $46 AND $103; PRIME OBLIGATIONS FUND, $9, $27, $47 AND $105;
AND TAX FREE OBLIGATIONS FUND, $11, $33, $57 AND $126.
<PAGE>
- --------------------------------------------------------------------------------
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
PRIME
OBLIGATIONS
FUND
- ----------------------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Maximum contingent deferred sales charge (AS A
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, AS APPLICABLE)(1) 5.00%
Redemption fees None
Exchange fees None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(2) 0.33%
Rule 12b-1 fees 1.00%(3)
Other expenses 0.12%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.45%
- ----------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING
(i) A 5% ANNUAL RETURN, (ii) REDEMPTION AT THE END OF EACH TIME PERIOD WITH THE
PAYMENT OF THE MAXIMUM APPLICABLE CONTINGENT DEFERRED SALES CHARGE OF 5% IN
YEAR 1, 4% IN YEAR 3, 2% IN YEAR 5 AND AUTOMATIC CONVERSION TO CLASS A SHARES
AT THE END OF YEAR 8 (COLUMN 1) AND (iii) NO REDEMPTION (COLUMN 2):
<TABLE>
<CAPTION>
(ASSUMING (ASSUMING NO
REDEMPTION)(4) REDEMPTION)(5)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
1 year $ 65 $ 15
3 years $ 86 $ 46
5 years $ 99 $ 79
10 years $153 $153
</TABLE>
(1) CLASS B SHARES OF PRIME OBLIGATIONS FUND ARE ONLY AVAILABLE PURSUANT TO AN
EXCHANGE FOR CLASS B SHARES OF ANOTHER FUND IN THE FIRST AMERICAN FAMILY OF
FUNDS PURSUANT TO A SYSTEMATIC EXCHANGE PROGRAM FOR THE PURCHASE OF CLASS B
SHARES OF SUCH OTHER FUND. THE DEFERRED SALES CHARGE APPLIED TO CLASS B
SHARES OF THE FUND AT THE TIME OF REDEMPTION WILL BE EQUAL TO THE DEFERRED
SALES CHARGE THAT WOULD HAVE BEEN APPLIED TO THE SHARES OF SUCH OTHER FUND.
CURRENTLY, THE MAXIMUM DEFERRED SALES CHARGES ON SUCH SHARES IS 5.00%.
(2) THE ADVISOR INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN ABOVE REFLECT THESE WAIVERS AS OF DATE OF THIS PROSPECTUS.
THE ADVISOR INTENDS TO MAINTAIN SUCH WAIVER FOR THE CURRENT FISCAL YEAR BUT
RESERVES THE RIGHT TO TERMINATE ITS WAIVER AT ANY TIME THEREAFTER IN ITS
SOLE DISCRETION. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR THE
FUND AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE 0.40%;
AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS WOULD BE 1.52%.
"OTHER EXPENSES" INCLUDES AN ANNUAL ADMINISTRATION FEE.
(3) OF THIS AMOUNT, 0.25% IS DESIGNED AS A SHAREHOLDER SERVICING FEE AND 0.75%
AS A DISTRIBUTION FEE.
(4) ABSENT THE FEE WAIVER REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10 YEAR PERIOD IN THE EXAMPLE ABOVE WOULD BE AS FOLLOWS: $65,
$88, $103 AND $161.
(5) ABSENT THE FEE WAIVER REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5, AND 10 YEAR PERIOD (ASSUMING NO REDEMPTION) IN THE EXAMPLE ABOVE
WOULD BE AS FOLLOWS: $15, $48, $83 AND $161.
<PAGE>
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INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in the Funds
may bear directly or indirectly. THE DATA CONTAINED IN THE TABLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial highlights for each of the Funds should be
read in conjunction with the Funds' financial statements, the related notes
thereto and the independent auditors' report of KPMG Peat Marwick LLP
appearing in FAF's annual reports to shareholders dated September 30, 1997
and dated November 30, 1997 (for Tax Free Obligations Fund).
Because Class A Shares of Treasury Obligations Fund were first offered
November 3, 1997, and Government Obligations Fund were first offered April
21, 1998, no financial highlights for such Funds are provided. Further
information about the Funds' performance is contained in such FAF annual
reports which may be obtained without charge by calling (800) 637-2548 or by
writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456.
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
NET
DIVIDENDS ASSET
NET ASSET NET FROM NET VALUE
VALUE BEGINNING INVESTMENT INVESTMENT END OF
OF PERIOD INCOME INCOME PERIOD
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIME OBLIGATIONS FUND CLASS A
1997 $ 1.00 $ 0.049 $ (0.049) $ 1.00
1996 1.00 0.050 (0.050) 1.00
1995(1) 1.00 0.038 (0.038) 1.00
CLASS B
1997 $ 1.00 $ 0.042 $ (0.042) $ 1.00
1996 1.00 0.042 (0.042) 1.00
1995(2) 1.00 0.032 (0.032) 1.00
TAX FREE OBLIGATIONS FUND(3) CLASS A
1997(4)(5) $ 1.00 $ 0.010 $ (0.010) $ 1.00
1997(7) 1.00 0.027 (0.027) 1.00
1996(7) 1.00 0.028 (0.028) 1.00
1995(6)(7) 1.00 0.017 (0.017) 1.00
- -----------------------------------------------------------------------------------------
</TABLE>
+ RETURNS ARE FOR THE PERIOD INDICATED AND HAVE NOT BEEN ANNUALIZED.
(1) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE JANUARY 21, 1995 (THE FUND
ITSELF HAVING COMMENCED OPERATIONS ON MARCH 1, 1990). ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(2) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE JANUARY 23, 1995 (THE FUND
ITSELF HAVING COMMENCED OPERATIONS ON MARCH 1, 1990). ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.
(3) THE FINANCIAL HIGHLIGHTS FOR TAX FREE OBLIGATIONS FUND AS SET FORTH HEREIN
INCLUDE THE HISTORICAL FINANCIAL HIGHLIGHTS OF THE QUALIVEST TAX-FREE MONEY
MARKET FUND (CLASS A SHARES). THE ASSETS OF THE QUALIVEST TAX-FREE MONEY
MARKET FUND WERE ACQUIRED BY TAX FREE OBLIGATIONS FUND ON NOVEMBER 25, 1997.
IN CONNECTION WITH SUCH ACQUISITION, CLASS A SHARES OF THE QUALIVEST
TAX-FREE MONEY MARKET FUND WERE EXCHANGED FOR CLASS A SHARES OF TAX FREE
OBLIGATIONS FUND.
(4) FOR THE PERIOD COMMENCING ON AUGUST 1, 1997 AND ENDING ON NOVEMBER 30, 1997.
ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.
(5) THE BOARD OF DIRECTORS OF FAF APPROVED A CHANGE IN THE FUND'S FISCAL YEAR
END FROM JULY 31 TO NOVEMBER 30, EFFECTIVE NOVEMBER 30, 1997.
(6) COMMENCED OPERATIONS ON JANUARY 9, 1995. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.
(7) FOR THE PERIOD ENDED JULY 31.
<PAGE>
<TABLE>
<CAPTION>
RATIO OF
RATIO EXPENSES
RATIO OF OF NET TO AVERAGE
NET ASSETS EXPENSES INCOME TO NET ASSETS
TOTAL END OF TO AVERAGE AVERAGE (EXCLUDING
RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.06% $218,261 0.70% 4.95% 0.77%
5.08 135,146 0.70 4.94 0.79
3.84+ 96,083 0.70 5.43 0.82
4.27% $ 2,018 1.45% 4.17% 1.52%
4.29 1,763 1.45 4.15 1.54
3.28+ 14 1.45 4.70 1.57
0.96%+ $ 28,662 0.89% 2.83% 1.23%
2.76 31,668 0.88 2.73 1.23
2.81 30,143 0.89 2.78 1.25
1.66+ 33,569 1.00 2.98 1.36
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
THE FUNDS
First American Funds, Inc. is an open-end management investment company that
offers its shares in four different mutual funds, each of which evidences an
interest in a separate and distinct investment portfolio. Shareholders may
purchase shares in each FAF Fund through separate classes that provide for
variations in distribution costs, shareholder servicing fees, voting rights
and dividends. Except for these differences among classes, each share of
each FAF Fund represents an undivided proportionate interest in that Fund.
FAF is incorporated under the laws of the State of Minnesota, and its
principal offices are located at Oaks, Pennsylvania 19456.
This Prospectus relates only to the Class A Shares of Treasury Obligations
Fund, Government Obligations Fund, Prime Obligations Fund and Tax Free
Obligations Fund, and the Class B Shares of Prime Obligations Fund.
Information regarding the Class Y and Class D Shares of the Funds is
contained in separate prospectuses that may be obtained from FAF's
Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania 19456, or
by calling (800) 637-2548. The Board of Directors of FAF may authorize
additional series or classes of common stock in the future.
INVESTMENT OBJECTIVES
AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. A
Fund's investment objective may not be changed without an affirmative vote
of the holders of a majority (as defined in the 1940 Act) of the outstanding
shares of the Fund.
----------------------------------------------------------------------------
TREASURY OBLIGATIONS FUND
As a fundamental investment objective, Treasury Obligations Fund seeks to
achieve maximum current income consistent with the preservation of capital
and maintenance of liquidity. In seeking to achieve its investment
objective, Treasury Obligations Fund invests in United States Treasury
obligations maturing within 397 days or less as determined pursuant to Rule
2a-7 under the 1940 Act and repurchase agreements relating to such
securities. The Fund may also purchase such securities on a when-issued or
delayed delivery basis and lend securities from its portfolio. For a
discussion of these securities and techniques, see "Investment Restrictions
and Techniques" below.
----------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS FUND
As a fundamental investment objective, Government Obligations Fund seeks to
achieve maximum current income to the extent consistent with the
preservation of capital and maintenance of liquidity. In seeking to achieve
its investment objective, Government Obligations Fund invests exclusively in
United States Government securities maturing within 397 days as determined
pursuant to Rule 2a-7 under the 1940 Act, and in repurchase agreements
relating to such securities. The Fund may also purchase such securities on a
when-issued or delayed delivery basis and lend securities from its
portfolio. For a discussion of these securities and techniques, see
"Investment Restrictions and Techniques" below.
----------------------------------------------------------------------------
PRIME OBLIGATIONS FUND
As a fundamental investment objective, Prime Obligations Fund seeks to
achieve maximum current income to the extent consistent with the
preservation of capital and maintenance of liquidity. In seeking to achieve
its objective, the Fund invests in money market instruments, including
marketable securities issued or guaranteed by the United States Government
or its agencies or instrumentalities; United States dollar-denominated
obligations (including bankers' acceptances, time deposits, and certificates
of deposit, including variable rate certificates of deposit) of banks
(including commercial banks, savings banks, and savings and loan
associations)
<PAGE>
organized under the laws of the United States or any state, foreign banks,
United States branches of foreign banks, and foreign branches of United
States banks, if such banks have total assets of not less than $500 million;
and certain corporate and other obligations, including high grade commercial
paper, non-convertible corporate debt securities, and loan participation
interests with no more than 397 days remaining to maturity as determined
pursuant to Rule 2a-7 under the 1940 Act. For more information on these
types of securities, see "Investment Restrictions and Techniques" below.
The Fund may also (i) engage in repurchase agreements with respect to any of
its portfolio securities, (ii) purchase credit enhancement agreements to
enhance the creditworthiness of its portfolio securities, (iii) lend
securities from its portfolio or (iv) purchase the securities described
above on a when-issued or delayed delivery basis. See "Investment
Restrictions and Techniques" below.
The Fund may invest (i) up to 25% of its total assets in dollar-denominated
obligations of United States branches of foreign banks which are subject to
the same regulation as United States banks and (ii) up to 25% of its total
assets collectively in dollar-denominated obligations of foreign branches of
domestic banks, foreign banks and foreign corporations. The Fund may invest
in United States dollar-denominated obligations of foreign corporations if
the obligations satisfy the same quality standards set forth above for
domestic corporations. See "Investment Restrictions and Techniques" for a
discussion of the risks relating to investments in such securities.
----------------------------------------------------------------------------
TAX FREE OBLIGATIONS FUND
As a fundamental investment objective, Tax Free Obligations Fund seeks to
achieve maximum current income exempt from federal income taxes consistent
with the preservation of capital and maintenance of liquidity. In seeking to
achieve this objective and as a fundamental policy, the Fund invests at
least 80% of its total assets in municipal obligations, the income from
which is exempt from federal income tax. In addition, the Fund may invest up
to 20% of its total assets in municipal obligations, the income from which
is an item of tax preference for purposes of the federal alternative minimum
tax. For more information on these types of securities, see "Investment
Restrictions and Techniques -- Municipal Obligations" below.
The Fund may also (i) engage in repurchase agreements with respect to any of
its portfolio securities, (ii) purchase credit enhancement agreements to
enhance the creditworthiness of its portfolio securities, (iii) lend
securities from its portfolio, (iv) purchase the securities described above
on a when-issued or delayed delivery basis, (v) purchase put options with
respect to its portfolio securities and (vi) invest in variable or floating
rate obligations. See "Investment Restrictions and Techniques" below.
The Fund may invest up to 20% of its total assets collectively in taxable
money market securities including marketable securities issued or guaranteed
by the United States Government or its agencies or instrumentalities;
certain United States dollar denominated obligations (including bankers'
acceptances, and certificates of deposit, including variable rate
certificates of deposit) of banks (including commercial banks, savings
banks, and savings and loan associations) organized under the laws of the
United States or any state, foreign banks, United States branches of foreign
banks, if such banks have total assets of not less than $500 million; and
certain corporate and other obligations, including high grade commercial
paper, non-convertible corporate debt securities, and loan participation
interests with no more than 397 days remaining to maturity as determined
pursuant to Rule 2a-7 under the 1940 Act. In addition, the Fund's engagement
in lending portfolio securities and in purchasing put options with respect
to its portfolio securities may result in taxable income. For defensive
purposes, the Fund may temporarily invest more than 20% (up to 100%) of the
value of its total assets in taxable money market securities and certain
tax-exempt securities, the income on which is an item of tax
<PAGE>
preference for purposes of the federal alternative minimum tax when, in the
opinion of the Advisor, it is advisable to do so in light of prevailing
market and economic conditions for purposes of preserving liquidity or
capital. See "Investment Restrictions and Techniques" for a discussion of
the risks relating to investments in such securities.
MANAGEMENT OF THE FUNDS
The Board of Directors of FAF has the primary responsibility for overseeing
the overall management and electing other officers of FAF. Subject to the
overall direction and supervision of the Board of Directors, the Advisor
acts as investment Advisor for and manages the investment portfolios of FAF.
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INVESTMENT ADVISOR
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment Advisor through its First
American Asset Management group. The Advisor has acted as an investment
Advisor to FAF since its inception in 1982 and has acted as an investment
Advisor to First American Investment Funds, Inc. since 1987 and to First
American Strategy Funds, Inc. since 1996. As of September 30, 1997, the
Advisor was managing accounts with an aggregate value of approximately $55
billion, including mutual fund assets of approximately $20 billion. U.S.
Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402, is the
holding company for the Advisor.
Each of the Funds pays the Advisor a monthly fee equal, on an annual basis,
to 0.40% of the Fund's average daily net assets. The Advisor may, at its
option, waive any or all of its fees, or reimburse expenses, with respect to
the Fund from time to time. Any such waiver or reimbursement is voluntary
and may be discontinued at any time except each of the Funds other than
Government Obligations Fund have agreed to maintain current waivers in
effect through September 30, 1998. The Advisor also may absorb or reimburse
expenses of the Funds from time to time, in its discretion, while retaining
the ability to be reimbursed by the Funds for such amounts prior to the end
of the fiscal year. This practice would have the effect of lowering a Fund's
overall expense ratio and of increasing yield to investors, or the converse,
at the time such amounts are absorbed or reimbursed, as the case may be.
The Glass-Steagall Act generally prohibits banks from engaging in the
business of underwriting, selling, or distributing securities and from being
affiliated with companies principally engaged in those activities. In
addition, administrative and judicial interpretations of the Glass-Steagall
Act prohibit bank holding companies and their bank and nonbank subsidiaries
from organizing, sponsoring, or controlling registered open-end investment
companies that are continuously engaged in distributing their shares. Bank
holding companies and their bank and nonbank subsidiaries may serve,
however, as investment Advisors to registered investment companies, subject
to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Advisor is not prohibited from performing the
investment advisory services described above, and that certain
broker-dealers affiliated with the Advisor, are not prohibited from serving
as a Participating Institution as described herein. In the event of changes
in federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Advisor and
certain affiliated broker-dealers might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors
would make other arrangements and shareholders would not suffer adverse
financial consequences.
<PAGE>
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PORTFOLIO MANAGERS
JOSEPH M. ULREY III is portfolio co-manager for each of the Funds. He is a
member of the Advisor's asset allocation committee. He joined the Advisor
in 1991 and has 16 years of investment industry experience. Prior to
joining the Advisor, Mr. Ulrey spent 10 years overseeing various functions
in the Treasury and Finance Divisions of U.S. Bancorp. Mr. Ulrey received
his bachelor's degree in mathematics/economics from Macalester College and
his master's degree in business administration from the University of
Chicago.
JAMES D. PALMER is portfolio co-manager for each of the Funds. He joined the
Advisor in 1992 and has over seven years of investment industry experience.
Prior to joining the Advisor, Mr. Palmer was a securities lending trader and
senior master trust accountant with U.S. Bank National Association. Mr.
Palmer received his bachelor's degree from the University of Wisconsin --
LaCrosse and his master's degree in business administration from the
University of Minnesota.
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CUSTODIAN
The Custodian of the Funds' assets is U.S. Bank National Association (the
"Custodian"), U.S. Bank Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of U.S. Bancorp. As compensation for
its services to the Funds, the Custodian is paid 0.03% of each Fund's
average daily net assets. In addition, the Custodian is reimbursed for its
out-of-pocket expenses incurred in providing services to the Funds.
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ADMINISTRATOR
The administrator for the Funds is SEI Investments Management Corporation,
Oaks Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of SEI
Investments Company, provides the Funds with certain administrative
personnel and services necessary to operate the Funds. Such services include
shareholder servicing and certain legal and accounting services. The
Administrator provides these personnel and services for compensation at an
annual rate equal to 0.07% of each Fund's average daily net assets, provided
that to the extent that the aggregate net assets of all First American Funds
exceed $8 billion, the percentage stated above is reduced to 0.055%. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.
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TRANSFER AGENT
DST Systems, Inc. serves as the transfer agent (the "Transfer Agent") and
dividend disbursing agent for the Funds. The address of the Transfer Agent
is 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent
is not affiliated with the Distributor, the Administrator or the Advisor.
Effective October 1, 1998, FAF has appointed U.S. Bank National Association
as servicing agent to perform certain transfer agent and dividend disbursing
agent services with respect to Class A Shares of the Funds and Class B
Shares of Prime Obligations Fund held through accounts at U.S. Bank and its
affiliates. The Funds pay U.S. Bank an annual fee of $9 per account for such
services.
DISTRIBUTOR
SEI Investments Distribution Co. is the principal distributor for shares of
the Funds. The Distributor, which is not affiliated with the Advisor, is a
Pennsylvania corporation organized on July 20, 1981, and is the principal
distributor for a number of investment companies. The Distributor is a
wholly-owned subsidiary of SEI Investments Company and is located at Oaks,
Pennsylvania 19456.
FAF has adopted a Rule 12b-1 plan and entered into a distribution and
shareholder servicing agreement with the Distributor with respect to
distribution-related activities and shareholder
<PAGE>
servicing for the Class A Shares of the Funds. In consideration of the
services and facilities to be provided by the Distributor or any service
provider, each Fund pays the Distributor a shareholder servicing fee monthly
at an annual rate of 0.25% of the Fund's Class A Shares' average daily net
asset value, which fee is computed and paid monthly. The shareholder
servicing fee is intended to compensate the Distributor for ongoing
servicing and/or maintenance of shareholder accounts and may be used by the
Distributor to provide compensation to institutions through which
shareholders hold their shares for ongoing servicing and/or maintenance of
shareholder accounts.
FAF has also adopted a Plan of Distribution with respect to the Class B
Shares of Prime Obligations Fund (the "Class B Distribution Plan"), pursuant
to Rule 12b-1 under the 1940 Act. With respect to the Class B Shares, FAF
has also entered into a Distribution and Service Agreement with the
Distributor on behalf of Prime Obligations Fund (the "Class B Distribution
Agreement"). Under the Class B Distribution Plan and the Class B
Distribution Agreement, the Distributor is authorized to retain the
contingent deferred sales charge that may be paid upon redemption of this
Fund's Class B Shares, and the Fund pays the Distributor a distribution fee
at an annual rate of 0.75% of the Fund's Class B Shares average daily net
asset value, which fee is computed and paid monthly. The distribution fee
may be used by the Distributor to provide compensation for sales support and
distribution activities with respect to Class B Shares of this Fund. In
addition to the distribution fee, the Distributor is paid a shareholder
servicing fee of 0.25% of the average daily net assets of the Class B Shares
pursuant to the Class B Distribution Plan and a shareholder service plan
(the "Class B Service Plan"), which fee may be used by the Distributor to
provide compensation for ongoing servicing and maintenance of shareholder
accounts with respect to the Class B Shares of this Fund. The distribution
fee paid to the Distributor under the Class B Distribution Plan is used by
the Distributor to compensate broker-dealers, including the Distributor and
the Distributor's registered representatives, for their sale of Fund shares,
and may also be used to pay other advertising and promotional expenses in
connection with the distribution of Fund shares.
The foregoing plans recognize that the Distributor, the Administrator and
the Advisor may in their discretion use their own assets to pay for certain
costs of distributing Fund shares. Any such arrangement to pay such
additional costs may be in the form of cash or promotional incentives and
may be commenced or discontinued by the Advisor, the Administrator, the
Distributor, or any Participating Institution (as defined below) at any
time. The Distributor may engage securities dealers, financial institutions
(including, without limitation, banks), and other industry professionals
(the "Participating Institutions") to perform share distribution and
shareholder support services for the Fund. U.S. Bancorp Investments, Inc.
("USBI") and U.S. Bancorp. Piper Jaffray Inc., broker-dealers affiliated
with the Advisor, are Participating Institutions.
The investment company shares and other securities distributed by the
Distributor are not deposits or obligations of, or endorsed or guaranteed
by, U.S. Bank or its affiliates, and are not insured by the Bank Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation.
PORTFOLIO TRANSACTIONS
The Funds anticipate being as fully invested as practicable in debt
securities. Most of the Funds' portfolio transactions are effected with
dealers at a spread or markup. The dealer's profit, if any, is the
difference, or spread, between the dealer's purchase and sale price for the
obligation. The Funds may authorize the Advisor to place brokerage orders
with some brokers who help distribute the Funds' shares, if the Advisor
reasonably believes that the commission and transaction quality are
comparable to that available from other qualified brokers. Because the
Advisor trades a large number of securities, dealers generally are willing
to work with the Advisor on
<PAGE>
a more favorable spread to the Funds than would be possible for most
individual investors.
A greater spread may be paid to those firms that provide research services.
The Advisor may use this research information in managing the Funds' assets.
The Advisor uses its best efforts to obtain execution of the Funds'
portfolio transactions at spreads which are reasonable in relation to the
benefits received.
INVESTING IN THE FUNDS
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SHARE PURCHASES
Shares are sold at their net asset value on days on which both the New York
Stock Exchange and federally-chartered banks are open for business. Shares
of the Funds may be purchased as described below. Class B Shares of Prime
Obligations Fund are only available pursuant to an exchange from a mutual
fund in the First American family of funds that assesses a contingent
deferred sales charge. The Funds reserve the right to reject any purchase
request.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a financial
institution which has a sales agreement with the Distributor. An investor
may call his or her financial institution to place an order. Purchase orders
must be received by the financial institution by the time specified by the
institution to be assured same day processing. Purchase orders for Treasury
Obligations Fund, Government Obligations Fund and Prime Obligations Fund
must be transmitted to and received by the Funds by 2:00 p.m. Central time
and purchase orders for Tax Free Obligations Fund must be transmitted to and
received by the Fund by 11:30 a.m. Central time, in order for shares to be
purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service.
BY MAIL. An investor may place an order to purchase shares of the Funds
directly through the Transfer Agent. Orders by mail will be executed upon
receipt of payment by the Transfer Agent. If an investor's check does not
clear, the purchase will be cancelled and the investor could be liable for
any losses or fees incurred. Third-party checks, credit cards, credit card
checks and cash will not be accepted. When purchases are made by check, the
proceeds of redemptions of the shares are not available until the Transfer
Agent is reasonably certain that the purchase payment has cleared, which
could take up to ten calendar days from the purchase date.
In order to purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of Treasury Obligations Fund, Government
Obligations Fund and Prime Obligations Fund by wire, call (800) 637-2548
before 2:00 p.m. Central time to place an order. To purchase shares of Tax
Free Obligations Fund by wire, call (800) 637-2548 before 11:30 a.m.
Central time to place an order. All information needed will be taken over
the telephone, and the order will be considered received when the
Custodian receives payment by wire. If the Custodian does not receive the
wire by the applicable deadline, the order will be executed the next
business day. Federal funds should be wired as follows: U.S. Bank National
Association, Minneapolis, Minnesota; ABA Number 091000022; For Credit to:
DST Systems, Inc.: Account Number 160234580266; For Further Credit To:
(Investor Name and Fund Name). Shares cannot be purchased by Federal
Reserve wire on
<PAGE>
days on which the New York Stock Exchange is closed or federally-chartered
banks are closed.
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment is $1,000, unless the investment is in a
retirement plan, in which case the minimum initial investment is $250. The
minimum subsequent investment is $100. The Funds reserve the right to waive
the minimum investment requirement in certain cases for employees of the
Advisor and its affiliates.
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ALTERNATIVE PURCHASE OPTIONS
Class A Shares and Class B Shares represent interests in a Fund's portfolio
of investments. The classes have the same rights and are identical in all
respects except that (i) Class B Shares bear the expenses of the contingent
deferred sales charge arrangement; (ii) Class A Shares and Class B Shares
bear different expenses in connection with their respective shareholder
servicing plans and distribution plans; (iii) each class has exclusive
voting rights with respect to approvals of any Rule 12b-1 distribution plan
or service plan related to that specific class; and (iv) each class has
different exchange features. Sales personnel of broker-dealers distributing
the Funds' shares, and other persons entitled to receive compensation for
selling shares, may receive differing compensation for selling Class A and
Class B Shares.
CLASS A SHARES. Each Fund's Class A Shares are offered on a continuous basis
at their next determined offering price, which is net asset value. There is
no initial or contingent deferred sales charge on purchases of Class A
Shares. Class A Shares are subject to a shareholder servicing fee paid to
the Distributor monthly at an annual rate of 0.25% of the Class A Shares'
average daily net assets. See "Distributor" above.
CLASS B SHARES. Class B Shares are only available with respect to Prime
Obligations Fund. Class B Shares are sold at net asset value without any
initial sales charge. Class B Shares are available for purchase only in
exchange for shares of a mutual fund in the First American family of funds
that assess a contingent deferred sales charge (the "Exchange Class Shares")
or through a systematic exchange program as described below. Currently, only
the Class B Shares of the funds in the First American family of funds assess
a contingent deferred sales charge. If an investor redeems Class B Shares of
Prime Obligations Fund within eight years of purchase of the Exchange Class
Shares, he or she will pay a contingent deferred sales charge in an amount
equal to the contingent deferred sales charge he or she would have paid on
the Exchange Class Shares, assuming no exchange had occurred. Consequently,
if a shareholder exchanges Exchange Class Shares for Class B Shares of Prime
Obligations Fund, the transaction will not be subject to a contingent
deferred sales charge; however, when Class B Shares acquired through the
exchange are redeemed, the shareholder will be treated as if no exchange
took place for the purpose of determining the contingent deferred sales
charge and will be charged a contingent deferred sales charge at the rates
set forth below. This charge is assessed on an amount equal to the lesser of
the then-current market value or the cost of the shares being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value, if
any, above the initial purchase price or on shares derived from reinvestment
of dividends or capital gains distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------------------------------------------
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
- -------------------------------------------------------
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is
<PAGE>
assumed that the redemption is first, of any Class A Shares in the
shareholder's Fund account; second, of any Class B Shares held for more than
eight years and Class B Shares acquired pursuant to reinvestment of
dividends or other distributions; and third, of Class B Shares held longest
during the eight year period. This method should result in the lowest
possible sales charge.
At the end of the period ending eight years after the beginning of the month
in which the Exchange Class Shares were issued, Class B Shares will
automatically convert to Class A Shares and will no longer be subject to the
Class B distribution and service fees. This conversion will be on the basis
of the relative net asset values of the two classes.
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SYSTEMATIC INVESTMENT PROGRAM
Once an account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may
be automatically withdrawn periodically from the shareholder's checking
account and invested in Fund shares at the net asset value next determined
after an order is received. A shareholder may apply for participation in
this program through his or her financial institution or call (800)
637-2548.
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SYSTEMATIC EXCHANGE PROGRAM
Shares of the Funds also may be exchanged through automatic monthly
deductions from an investor's account for the same class of shares of First
American Investment Funds, Inc. ("FAIF") or First American Strategy Funds,
Inc. ("FASF"). Under a systematic exchange program, an investor initially
purchases Class A or Class B Shares of Prime Obligations Fund in an amount
equal to the total amount of the investment the investor desires to make in
the same class of shares of FAIF or FASF. On a monthly basis a specified
dollar amount of Prime Obligations Fund shares is exchanged for shares of
the same class of a specified portfolio of FAIF or FASF. Exchanges of Class
A Shares will be subject to the applicable sales charge imposed by the FAIF
portfolio and, accordingly, it may be beneficial for an investor to execute
a letter of intent in connection with a Class A Shares systematic exchange
program. Exchanges of Class B Shares are not subject to a contingent
deferred sales charge, but if shares are redeemed rather than exchanged, the
shares are subject to such a charge. Shares of FASF are not subject to a
sales charge. The systematic exchange program of investing a fixed dollar
amount at regular intervals over time in a FAIF or FASF portfolio has the
effect of reducing the average cost per share of the shares of the portfolio
acquired. This effect also can be achieved through the FAIF or FASF
systematic investment program, which is described in the applicable
prospectuses. A shareholder may apply for participation in the systematic
exchange program through his or her financial institution or by calling
(800) 637-2548.
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CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds. Confirmations of each purchase
and redemption are sent to each shareholder. In addition, monthly
confirmations are sent to report all transactions and dividends paid during
that month.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income will be accrued daily and paid monthly.
Dividends are automatically reinvested on payment dates in additional shares
of the Funds, unless cash payments are requested by contacting the
applicable Fund. Shares purchased through the Funds before 2:00 p.m. Central
time (for Treasury Obligations Fund, Government Obligations Fund and Prime
Obligations Fund) and before 11:30 a.m. Central time (for Tax Free
Obligations Fund) earn dividends that day. Dividends payable on Class B
Shares will generally be less than the dividends payable on Class A Shares
because of
<PAGE>
the greater distribution and shareholder service expenses charged to Class
B Shares.
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EXCHANGE PRIVILEGE
Shareholders may exchange Class A Shares of each Fund or Class B Shares of
Prime Obligations Fund for currently available Class A or Class B Shares,
respectively, of the other funds in the First American family of funds.
Exchanges of Class A Shares of a Fund will be subject to imposition of sales
charges, as applicable, unless such shares are shown to have been originally
issued in exchange for shares in the First American family of funds that had
a sales charge. Exchanges of shares among the funds must meet any applicable
minimum investment of the fund for which shares are being exchanged.
The ability to exchange shares of the Funds does not constitute an offering
or recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares
being acquired may be sold. Exchanges may be accomplished by a written
request, or by telephone if a preauthorized exchange authorization is on
file with the Transfer Agent, shareholder servicing agent, or financial
institution.
Written exchange requests must be signed exactly as shown on the
authorization form, and the signatures may be required to be guaranteed as
for a redemption of shares by an entity described under "Redeeming Shares --
By Mail." Neither the Funds, the Distributor, the Transfer Agent, any
shareholder servicing agent, nor any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions. See also "Redeeming Shares."
Telephone exchange instructions made by the investor may be carried out only
if a telephone authorization form completed by the investor is on file with
the Transfer Agent, shareholder servicing agent, or financial institution.
Shares may be exchanged between two funds by telephone only if the two funds
have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 2:00 p.m. Central time (for Treasury Obligations Fund, Government
Obligations Fund and Prime Obligations Fund) and before 11:30 a.m. Central
time (for Tax Free Obligations Fund), or by a shareholder's shareholder
servicing agent or financial institution by the time specified by it, in
order for shares to be exchanged the same day. Neither the Transfer Agent
nor the Funds will be responsible for the authenticity of exchange
instructions received by telephone if it reasonably believes those
instructions to be genuine. The Funds and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are
genuine, and they may be liable for losses resulting from unauthorized or
fraudulent telephone instructions if they do not employ these procedures.
Shareholders of a Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his or her
broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to DST
Systems, Inc., 330 West Ninth Street, Kansas City, Missouri 64105. The
exchange privilege should not be used to take advantage of short-term swings
in the securities markets. The Funds reserve the right to limit or terminate
exchange privileges as to any shareholder who makes exchanges more than four
times a year (other than through the Systematic Exchange Program or similar
periodic investment programs). The Funds may modify or revoke the exchange
privilege for all shareholders upon 60 days' prior written notice or without
notice in times of drastic economic or market change.
The terms of any exchange privilege may be modified or terminated by the
Funds at any time. There are currently no additional fees or charges for the
exchange service and the Funds do not contemplate establishing such fees or
charges,
<PAGE>
although the Funds reserve the right to do so. Shareholders will be notified
of any modification or termination of the exchange privilege and of the
imposition of any additional fees or charges.
REDEEMING SHARES
Each Fund redeems shares at the net asset value next determined after the
Transfer Agent receives the redemption request, reduced by any applicable
contingent deferred sales charge on Class B Shares. Redemptions will be made
on days on which a Fund computes its net asset value. Redemptions can be
made as described below and must be received in proper form.
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BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the privilege
on the initial shareholder application, by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net
asset value next determined after the Fund receives the redemption request
from the financial institution (less the amount of any applicable contingent
deferred sales charge). Redemption requests must be received by the
financial institution by the time specified by the institution to be assured
same day processing and redemption requests must be transmitted to and
received by the Funds by 2:00 p.m. Central time (for Treasury Obligations
Fund, Government Obligations Fund and Prime Obligations Fund) and by 11:30
a.m. Central time (for Tax Free Obligations Fund), for same day processing.
Pursuant to instructions received from the financial institution,
redemptions will be made by check or by wire transfer. It is the financial
institution's responsibility to transmit redemption requests promptly.
Redemptions processed by 2:00 p.m. Central time (for Treasury Obligations
Fund, Government Obligations Fund and Prime Obligations Fund) and by 11:30
a.m. Central time (for Tax Free Obligations Fund) will not receive that
day's dividend. Redemption requests placed after that respective time will
earn that day's dividend, but will not receive proceeds until the following
day.
Shareholders who did not purchase their shares through a financial
institution may redeem Fund shares by telephoning (800) 637-2548. At the
shareholder's request, redemption proceeds will be paid by check and mailed
to the shareholder's address of record or wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System, normally within one business day, but in no event
longer than seven days after the request. Wire instructions must be
previously established in the account or provided in writing. The minimum
amount for a wire transfer is $1,000. If at any time a Fund determines it
necessary to terminate or modify this method of redemption, shareholders
will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. The Transfer Agent
and the Funds will each employ reasonable procedures to confirm that
instructions communicated are genuine. These procedures may include taping
of telephone conversations. To ensure authenticity of redemption or exchange
instructions received by telephone, the Transfer Agent examines each
shareholder request by verifying the account number and/or taxpayer
identification number at the time such request is made. The Transfer Agent
subsequently sends confirmations of both exchange sales and exchange
purchases to the shareholder for verification. If reasonable procedures are
not employed, the Transfer Agent and the Funds may be liable for any losses
due to unauthorized or fraudulent telephone transactions.
<PAGE>
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BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should
call the Funds, shareholder servicing agent or financial institution for
assistance in redeeming by mail. A check for redemption proceeds normally is
mailed within one business day, but in no event more than seven business
days, after receipt of a proper written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Funds, or
a redemption payable other than to the shareholder of record, must have
signatures on written redemption requests guaranteed by:
* a trust company or commercial bank, the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
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BY CHECKING ACCOUNT
At the shareholder's request, the Transfer Agent will establish a checking
account for redeeming Fund shares. With a Fund checking account, shares may
be redeemed simply by writing a check for $100 or more. The redemption will
be made at the net asset value on the date that the Transfer Agent presents
the check to a Fund. A check may not be written to close an account. If a
shareholder wishes to redeem shares and have the proceeds available, a check
may be written and negotiated through the shareholder's bank. Checks should
never be sent to the Transfer Agent to redeem shares. Copies of canceled
checks are available upon request. A fee is charged for this service. For
further information, contact the Funds.
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BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate
in the Systematic Withdrawal Program. Under this program, Fund shares are
redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. A shareholder may apply for participation in this
program through his or her financial institution. Because automatic
withdrawals of Class B Shares are subject to the contingent deferred sales
charge, it may not be in the best interest of a Class B shareholder to
participate in the Systematic Withdrawal Program.
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REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transferred through the
Automated Clearing House, the proceeds of redemption of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has
<PAGE>
cleared, which could take up to ten calendar days from the purchase date.
----------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Funds
may redeem shares in any account, except retirement plans, and pay the
proceeds to the shareholder if the account balance falls below the required
minimum value of $500. This requirement does not apply, however, if the
balance falls below $500 because of changes in a Fund's net asset value.
Before shares are redeemed to close an account, the shareholder will be
notified in writing and allowed 60 days to purchase additional shares to
meet the minimum account requirement.
DETERMINING THE PRICE
OF SHARES
The net asset value per share is determined as of the close of normal
trading on the New York Stock Exchange (3:00 p.m. Central time) Monday
through Friday on each day the New York Stock Exchange and
federally-chartered banks are open for business, provided that the net asset
value need not be determined on days when no Fund shares are tendered for
redemption and no order for that Fund's shares is received and on days on
which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per share
for purchases or redemptions is such value next computed after the Transfer
Agent receives the purchase order or redemption request. It is the
responsibility of Participating Institutions to promptly forward purchase
and redemption orders to the Transfer Agent. In the case of redemptions and
repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent or a Fund may require additional documents to evidence appropriate
authority in order to effect the redemption and the applicable price will be
that next determined following the receipt of the required documentation.
The net asset value per share for each Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less
all liabilities, by the number of Fund shares outstanding.
Securities in the Funds' portfolios are valued on the basis of amortized
cost. This means valuation assumes a steady rate of payment from the date of
purchase until maturity instead of looking at actual changes in market
value. The Funds' other assets are valued by a method which the FAF Board of
Directors believes would accurately reflect fair value.
TAXES
The Funds will distribute all of its net income to shareholders. Dividends
paid by Treasury Obligations Fund, Government Obligations Fund and Prime
Obligations Fund will be taxable as ordinary income to shareholders, whether
reinvested or received in cash.
Tax Free Obligations Fund intends to take all actions required under the
Internal Revenue Code of 1986, as amended (the "Code"), to ensure that it
may pay "exempt-interest dividends." If the Fund meets these requirements,
distributions of net interest income from tax-exempt obligations that are
designated by the Fund as exempt-interest dividends will be excludable from
gross income of the Fund's shareholders. Distributions paid from other
interest income will be taxable to shareholders as ordinary income.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a
taxpayer's regular income tax liability (with certain adjustments).
Liability for AMT will depend upon each shareholder's tax situation.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986, to finance certain
private activities, will be treated
<PAGE>
as an item of tax preference that is included in alternative minimum taxable
income for purposes of calculating the AMT for all taxpayers. Tax Free
Obligations Fund may invest up to 20% of its total assets in securities, the
interest on which is treated as an item of tax preference that is included
in alternative minimum taxable income for purposes of calculating the AMT.
Also, a portion of all other tax-exempt interest received by a corporation,
including exempt-interest dividends, will be included in adjusted current
earnings and earnings and profits for purposes of determining the federal
corporate alternative minimum tax and the branch profits tax imposed on
foreign corporations under Section 884 of the Code. Each shareholder is
advised to consult his or her tax Advisor with respect to the possible
effects of such tax preference items.
For a more detailed discussion of the taxation of the Funds and the tax
consequences of an investment in the Fund, see "Taxes" in the Statement of
Additional Information.
FUND SHARES
Each share of the Funds is fully paid, nonassessable, and transferable.
Shares may be issued as either full or fractional shares. Fractional shares
have pro rata the same rights and privileges as full shares. Shares of the
Funds have no preemptive or conversion rights.
Each share of the Funds has one vote. On some issues, such as the election
of directors, all shares of all FAF funds vote together as one series. The
shares do not have cumulative voting rights. Consequently, the holders of
more than 50% of the shares voting for the election of directors are able to
elect all of the directors if they choose to do so. On issues affecting only
a particular Fund or class, the shares of that Fund or class will vote as a
separate series. Examples of such issues would be proposals to alter a
fundamental investment restriction pertaining to a Fund or to approve,
disapprove or alter a distribution plan pertaining to a class.
The Bylaws of FAF provide that annual shareholders' meetings are not
required and that meetings of shareholders need be held only with such
frequency as required under Minnesota law and the 1940 Act.
CALCULATION OF
PERFORMANCE DATA
From time to time each Fund may advertise its "yield" and "effective yield"
and, in the case of Tax Free Obligations Fund, "tax-equivalent yield" in
advertisements or in reports or other communications with shareholders. Both
yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of a Fund refers to the income
generated by an investment over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized," that is, the
amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of
the investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
"Tax equivalent yield" is that yield which a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated
federal or combined federal/state income tax bracket (normally assumed to be
the maximum tax rate or combined rate). Tax equivalent yield is computed by
dividing that portion of the yield which is tax-exempt by one minus the
stated income tax rate, and adding the resulting amount to that portion, if
any, of the yield which is not tax-exempt.
Advertisements and other sales literature for a Fund may refer to the Fund's
"cumulative total return" and "average annual total return." Total return is
based on the overall dollar or percentage change in value of a hypothetical
investment in a Fund assuming dividend distributions are
<PAGE>
reinvested. A cumulative total return reflects the Fund's performance over a
stated period of time. An average annual total return reflects the
hypothetical annually compounded rate that would have produced the same
cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a
Fund's performance, they are not the same as actual year-by-year results.
Performance quotations are computed separately for Class A, Class B, Class Y
and Class D Shares of the Funds. The performance of each class will differ
due to the varying levels of distribution fees and shareholder service fees
applicable to each class.
INVESTMENT RESTRICTIONS
AND TECHNIQUES
----------------------------------------------------------------------------
GENERAL RESTRICTIONS
The Funds are subject to the investment restrictions of Rule 2a-7 under the
1940 Act in addition to other policies and restrictions discussed herein.
Pursuant to Rule 2a-7, each Fund is required to invest exclusively in
securities that mature within 397 days from the date of purchase and to
maintain an average weighted maturity of not more than 90 days. Under Rule
2a-7, securities which are subject to specified types of demand or put
features may be deemed to mature at the next demand or put date although
they have a longer stated maturity. Rule 2a-7 also requires that all
investments by each Fund be limited to United States dollar-denominated
investments that (a) present "minimal credit risk" and (b) are at the time
of acquisition "Eligible Securities." Eligible Securities include, among
others, securities that are rated by two Nationally Recognized Statistical
Rating Organizations ("NRSROs") in one of the two highest categories for
short-term debt obligations, such as A-1 or A-2 by Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's"), or Prime-1 or Prime-2 by Moody's Investors Service, Inc.
("Moody's"). It is the responsibility of the Advisor to determine that the
Funds' investments present only "minimal credit risk" and are Eligible
Securities. The Board of Directors of FAF has established written guidelines
and procedures for the Advisor and oversees the Advisor's determination that
the Funds' portfolio securities present only "minimal credit risk" and are
Eligible Securities.
Rule 2a-7 requires, among other things, that each Fund may not invest, other
than in United States "Government Securities" (as defined in the 1940 Act),
more than 5% of its total assets in securities issued by the issuer of the
security; provided that the applicable Fund may invest in First Tier
Securities (as defined in Rule 2a-7) in excess of that limitation for a
period of up to three business days after the purchase thereof provided that
the Fund may not make more than one such investment at any time. Rule 2a-7
also requires that each Fund may not invest, other than in United States
Government securities, (a) more than 5% of its total assets in Second Tier
Securities (i.e., Eligible Securities that are not rated by two NRSROs in
the highest category such as A-1 and Prime-1) and (b) more than the greater
of 1% of its total assets or $1,000,000 in Second Tier Securities of any one
issuer.
In order to provide shareholders with full liquidity, the Funds have
implemented the following practices to maintain a constant price of $1.00
per share: limiting the portfolio's dollar-weighted average maturity to 90
days or less and buying securities which mature within 397 days from the
date of acquisition as determined pursuant to Rule 2a-7 under the 1940 Act.
The Funds cannot guarantee a $1.00 share price but these practices help to
minimize any price fluctuations that might result from rising or declining
interest rates. All money market instruments, including United States
Government securities, can change in value when interest rates or an
issuer's creditworthiness changes. The value of the securities in each
Fund's portfolios can be expected to vary inversely with changes in
prevailing interest rates, with the amount of such variation depending
primarily upon the period of time remaining to maturity of
<PAGE>
the security. If the security is held to maturity, no gain or loss will be
realized as a result of interest rate fluctuations.
As a fundamental policy of Government Obligations Fund and Prime Obligations
Fund, and a non-fundamental policy of Treasury Obligations Fund and Tax Free
Obligations Fund, each Fund will not purchase a security if, as a result
more than 10% of its net assets would be in illiquid assets including time
deposits and repurchase agreements maturing in more than seven days. As a
fundamental policy, each Fund will not purchase a security if, as a result
25% or more of its assets would be in any single industry, except that there
is no limitation on the purchase of obligations of domestic commercial banks
(excluding, for this purpose, foreign branches of domestic commercial
banks). The foregoing limitation does not apply to obligations issued or
guaranteed by the United States or its agencies or instrumentalities.
Unless otherwise stated, the policies described above in this section for
the Funds are non-fundamental and may be changed by a vote of the Board of
Directors. The Funds have adopted certain other investment restrictions,
which are set forth in detail in the Statement of Additional Information.
These restrictions are fundamental and may not be changed without the
approval of the holders of a majority (as defined in the 1940 Act) of the
outstanding shares of the Funds.
If a percentage limitation under this section or "Investment Objectives and
Policies," or under "Investment Restrictions" in the Statement of Additional
Information, is adhered to at the time of an investment, a later increase or
decrease in percentage resulting from changes in values of assets will not
constitute a violation of such limitation except in the case of the
limitation on illiquid investments.
The securities in which the Funds invest may not yield as high a level of
current income as longer term or lower grade securities. These other
securities may have less stability of principal, be less liquid, and
fluctuate more in value than the securities in which the Funds invest. All
securities in each Fund's portfolio are purchased with and payable in United
States dollars.
----------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS
As described under "Investment Objectives and Policies," Tax Free
Obligations Fund invests principally in municipal obligations such as
municipal bonds and other debt obligations. These municipal bonds and debt
obligations are issued by the states and by their local and special-purpose
political subdivisions. The term "municipal bond" as used in this Prospectus
includes short-term municipal notes and other commercial paper issued by the
states and their political subdivision.
Two general classifications of municipal bonds are "general obligation"
bonds and "revenue" bonds. General obligation bonds are secured by the
governmental issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. They are usually paid from general
revenues of the issuing governmental entity. Revenue bonds, on the other
hand, are usually payable only out of a specific revenue source rather than
from general revenues. Revenue bonds ordinarily are not backed by the faith,
credit or general taxing power of the issuing governmental entity. The
principal and interest on revenue bonds for private facilities are typically
paid out of rents or other specified payments made to the issuing
governmental entity by a private company which uses or operates the
facilities. Examples of these types of obligations are industrial revenue
bonds and pollution control revenue bonds. Industrial revenue bonds are
issued by governmental entities to provide financing aid to community
facilities such as hospitals, hotels, business or residential complexes,
convention halls and sport complexes. Pollution control revenue bonds are
issued to finance air, water and solids pollution control systems for
privately operated industrial or commercial facilities.
Revenue bonds for private facilities usually do not represent a pledge of
the credit, general revenues
<PAGE>
or taxing powers of the issuing governmental entity. Instead, the private
company operating the facility is the sole source of payment of the
obligation. Sometimes, the funds for payment of revenue bonds come solely
from revenue generated by operation of the facility. Revenue bonds which are
not backed by the credit of the issuing governmental entity frequently
provide a higher rate of return than other municipal obligations, but they
entail greater risk than obligations which are guaranteed by a governmental
unit with taxing power. Federal income tax laws place substantial
limitations on industrial revenue bonds, and particularly certain specified
private activity bonds issued after August 7, 1986. In the future,
legislation could be introduced in Congress which could further restrict or
eliminate the income tax exemption for interest on debt obligations in which
the Fund may invest.
Tax Free Obligations Fund's investment in municipal bonds and other debt
obligations that are purchased from financial institutions such as
commercial and investment banks, savings associations and insurance
companies may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax.
In addition, Tax Free Obligations Fund may invest in other federal income
tax-free securities such as (i) tax and revenue anticipation notes issued to
finance working capital needs in anticipation of receiving taxes or other
revenues, (ii) bond anticipation notes that are intended to be refinanced
through a later issuance of longer-term bonds, (iii) variable and floating
rate obligations including variable rate demand notes and (iv)
participation, trust and partnership interests in any of the foregoing
obligations.
----------------------------------------------------------------------------
LOAN PARTICIPATIONS; SECTION 4(2) AND RULE 144A SECURITIES
Prime Obligations Fund and Tax Free Obligations Fund may invest in loan
participation interests. A loan participation interest represents a pro rata
undivided interest in an underlying bank loan. Participation interests, like
the underlying loans, may have fixed, floating, or variable rates of
interest. The bank selling a participation interest generally acts as a mere
conduit between its borrower and the purchasers of interests in the loan.
The purchaser of an interest (for example, a Fund) generally does not have
recourse against the bank in the event of a default on the underlying loan.
Therefore, the credit risk associated with such instruments is governed by
the creditworthiness of the underlying borrowers and not by the banks
selling the interests. Loan participation interests that can be sold within
a seven-day period are deemed by the Advisor to be liquid investments. If a
loan participation interest is restricted from being sold within a seven-day
period, then Prime Obligations Fund (as a non-fundamental policy) and Tax
Free Obligations Fund (as a fundamental policy) will be limited, together
with other illiquid investments, to not more than 10% of the applicable
Fund's net assets. Commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 and
corporate obligations qualifying for resale to certain "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act of 1933
that meet the criteria for liquidity established by the Board of Directors
are considered liquid. Consequently, Prime Obligations Fund and Tax Free
Obligations Fund do not intend to subject such securities to the limitation
applicable to restricted securities. Investing in Rule 144A securities could
have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities.
----------------------------------------------------------------------------
SECURITIES OF FOREIGN BANKS AND BRANCHES
Because the portfolios of Prime Obligations Fund's and Tax Free Obligations
Fund's investments in taxable money market securities may contain securities
of foreign branches of domestic banks,
<PAGE>
foreign banks, and United States branches of foreign banks, such 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 United States banks. These risks may include future unfavorable political
and economic developments and possible withholding taxes, seizure of foreign
deposits, currency controls, interest limitations, or other governmental
restrictions which might affect the payment of principal or interest on
securities owned by such Fund. Additionally, there may be less public
information available about foreign banks and their branches. The Advisor
carefully considers these factors when making investments. The Funds have
agreed that, in connection with investment in securities issued by foreign
banks, United States branches of foreign banks, and foreign branches of
domestic banks, consideration will be given to the domestic marketability of
such securities in light of these factors.
----------------------------------------------------------------------------
UNITED STATES GOVERNMENT SECURITIES
Each Fund may invest in securities issued or guaranteed as to principal or
interest by the United States Government, or agencies or instrumentalities
of the United States Government. These investments include direct
obligations of the United States Treasury such as United States Treasury
bonds, notes, and bills. The Treasury securities are essentially the same
except for differences in interest rates, maturities, and dates of issuance.
In addition to Treasury securities, Government Obligations Fund, Prime
Obligations Fund and Tax Free Obligations Fund may invest in securities,
such as notes, bonds, and discount notes which are issued or guaranteed by
agencies of the United States Government and various instrumentalities which
have been established or sponsored by the United States Government. Except
for United States Treasury securities, these United States Government
obligations, even those which are guaranteed by federal agencies or
instrumentalities, 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. The Advisor
considers securities guaranteed by an irrevocable letter of credit issued by
a government agency to be guaranteed by that agency.
United States Treasury obligations include bills, notes and bonds issued by
the United States Treasury and separately traded interest and principal
component parts of such obligations that are transferable through the
Federal book-entry system known as Separately Traded Registered Interest and
Principal Securities ("STRIPS"). STRIPS are sold as zero coupon securities,
which means that they are sold at a substantial discount and redeemed at
face value at their maturity date without interim cash payments of interest
or principal. This discount is accreted over the life of the security, and
such accretion will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may
be subject to greater interest rate volatility than interest paying United
States Treasury obligations. A Fund's investments in STRIPS will be limited
to components with maturities of less than 397 days and the Funds will not
actively trade such components.
----------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Each Fund may engage in repurchase agreements with respect to any of its
portfolio securities. In a repurchase agreement, a Fund buys a security at
one price and simultaneously promises to sell that same security back to the
seller at a mutually agreed upon time and price. Each Fund may engage in
repurchase agreements with any member bank of the Federal Reserve System or
dealer in United States Government securities. Repurchase agreements usually
are for short periods, such as under one week, not to exceed 30 days. In all
cases, the Advisor must be satisfied with the creditworthiness of the other
party to the agreement
<PAGE>
before entering a repurchase agreement. In the event of bankruptcy of the
other party to a repurchase agreement, a Fund might experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities the Fund purchased may have decreased, the Fund could experience
a loss.
----------------------------------------------------------------------------
CREDIT ENHANCEMENT AGREEMENTS
Prime Obligations Fund and Tax Free Obligations Fund may arrange for
guarantees, letters of credit, or other forms of credit enhancement
agreements (collectively, "Guarantees") for the purpose of further securing
the payment of principal and/or interest on such Funds' investment
securities. Although each investment security, at the time it is purchased,
must meet such Funds' creditworthiness criteria, Guarantees sometimes are
purchased from banks and other institutions (collectively, "Guarantors")
when the Advisor, through yield and credit analysis, deems that credit
enhancement of certain of such Funds' securities is advisable. As a
non-fundamental policy, Prime Obligations Fund and Tax Free Obligations Fund
will limit the value of all investment securities issued or guaranteed by
each Guarantor to not more than 10% of the value of such Fund's total
assets.
----------------------------------------------------------------------------
PUT OPTIONS
Tax Free Obligations Fund may purchase tax-exempt securities which provide
for the right to resell them to the issuer, a bank or a broker-dealer at a
specified price within a specified period of time prior to the maturity date
of such obligations. Such a right to resell, which is commonly known as a
"put," may be sold, transferred or assigned only with the underlying
security or securities. The Fund may pay a higher price for a tax-exempt
security with a put than would be paid for the same security without a put.
The primary purpose of purchasing such securities with puts is to permit the
Fund to be as fully invested as practicable in tax-exempt securities while
at the same time providing the Fund with appropriate liquidity.
----------------------------------------------------------------------------
VARIABLE AND FLOATING RATE OBLIGATIONS
Certain of the obligations in which Tax Free Obligations Fund may invest may
be variable or floating rate obligations in which the interest rate is
adjusted either at predesignated periodic intervals (variable rate) or when
there is a change in the index rate of interest on which the interest rate
payable on the obligation is based (floating rate). Variable or floating
rate obligations may include a demand feature which is a put that entitles
the holder to receive the principal amount of the underlying security or
securities and which may be exercised either at any time on no more than 30
days' notice or at specified intervals not exceeding 397 calendar days on no
more than 30 days' notice. Variable or floating rate instruments with a
demand feature enable the Fund to purchase instruments with a stated
maturity in excess of 397 calendar days. The Fund determines the maturity of
variable or floating rate instruments in accordance with Securities and
Exchange Commission rules which allow the Fund to consider certain of such
instruments as having maturities that are less than the maturity date on the
face of the instrument.
----------------------------------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from
the resulting income will not be excludable from a shareholder's gross
income for income tax purposes. As with other extensions of credit, there
may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the Funds will only enter into loan arrangements with
broker-dealers, banks,
<PAGE>
or other institutions which the Advisor has determined are creditworthy
under guidelines established by the Board of Directors. In these loan
arrangements, the Funds will receive collateral in the form of cash, United
States Government securities or other high-grade debt obligations equal to
at least 100% of the value of the securities loaned. Collateral is marked to
market daily. The Funds will pay a portion of the income earned on the
lending transaction to the placing broker and may pay administrative and
custodial fees in connection with these loans which, in the case of U.S.
Bank National Association, are 40% of the Funds' income from such securities
lending transactions.
----------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed delivery
basis. The settlement dates for these types of transactions are determined
by mutual agreement of the parties and may occur a month or more after the
parties have agreed to the transaction. Securities purchased on a
when-issued or delayed delivery basis are subject to market fluctuation and
no interest accrues to the Fund during the period prior to settlement. At
the time a Fund commits to purchase securities on a when-issued or delayed
delivery basis, they will record the transaction and thereafter reflect the
value, each day, of such security in determining its net asset value. At the
time of delivery of the securities, the value may be more or less than the
purchase price. Each Fund will also establish a segregated account with its
Custodian in which they will maintain cash or cash equivalents or other
portfolio securities equal in value to commitments for such when-issued or
delayed delivery securities. A Fund will not purchase securities on a
when-issued or delayed delivery basis if, as a result thereof, more than 15%
of that Fund's net assets would be so invested.
----------------------------------------------------------------------------
MONEY MARKET FUNDS
Each of the Funds may invest, to the extent permitted by the 1940 Act, in
securities issued by other money market funds, provided that the permitted
investments of such other money market funds constitute permitted
investments of the investing Fund. The money market funds in which the Funds
may invest include other money market funds advised by the Advisor.
Investments by a Fund in other money market funds advised by the Advisor are
subject to certain restrictions contained in an exemptive order issued by
the Securities and Exchange Commission.
INFORMATION CONCERNING
COMPENSATION PAID TO
U.S. BANK NATIONAL
ASSOCIATION AND OTHER
AFFILIATES
U.S. Bank National Association and other affiliates of U.S. Bancorp may act
as a fiduciary with respect to plans subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") and other trust and agency accounts
that invest in the Funds. These U.S. Bancorp affiliates may receive
compensation from the Funds for the services they provide to the Funds, as
described more fully in the following sections of this Prospectus:
Investment advisory services -- see "Management of the Funds-Investment
Advisor"
Custodian services -- see "Management of the Funds-Custodian"
Sub-administration -- see "Management of the Funds-Administrator"
Transfer agent services -- see "Management of the Funds-Transfer Agent"
Shareholder servicing -- see "Distributor"
Securities lending -- see "Investment Restrictions and Techniques-Lending
of Portfolio Securities"
<PAGE>
FIRST AMERICAN FUNDS, INC.
Oaks, Pennsylvania 19456
Investment Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
Custodian
U.S. BANK NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456
Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456
Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
Kansas City, Missouri 64105
Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
FAF-1901 (5/98) R
<PAGE>
FIRST AMERICAN FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 21, 1998
AS SUPPLEMENTED ON MAY 4, 1998
TREASURY OBLIGATIONS FUND
GOVERNMENT OBLIGATIONS FUND
PRIME OBLIGATIONS FUND
TAX FREE OBLIGATIONS FUND
This Statement of Additional Information relates to the Class A,
Class Y and Class D Shares of Treasury Obligations Fund, Government Obligations
Fund, Prime Obligations Fund and Tax Free Obligations Fund and the Class B
Shares of Prime Obligations Fund, each of which is a series of First American
Funds, Inc. This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Funds' current Prospectuses. This
Statement of Additional Information is incorporated into the Funds' Prospectuses
by reference. To obtain copies of the Prospectuses, call (800) 637-2548 or write
SEI Investments Distribution Co., Oaks, Pennsylvania 19456. Please retain this
Statement of Additional Information for future reference.
TABLE OF CONTENTS
PAGE
General Information.................................. 2
Investment Restrictions.............................. 2
Portfolio Turnover .................................. 8
Directors and Executive Officers..................... 9
Investment Advisory and Other Services............... 12
Portfolio Transactions............................... 17
Capital Stock ....................................... 19
Net Asset Value and Public Offering Price ........... 21
Valuation of Portfolio Securities.................... 21
Taxes................................................ 22
Calculation of Performance Data...................... 23
Commercial Paper and Bond Ratings.................... 25
Financial Statements................................. 26
<PAGE>
GENERAL INFORMATION
First American Funds, Inc. ("FAF") was incorporated under the name
"First American Money Fund, Inc." The Board of Directors and shareholders, at
meetings held December 6, 1989 and January 18, 1990, respectively, approved
amendments to the Articles of Incorporation providing that the name "First
American Money Fund, Inc." be changed to "First American Funds, Inc."
As set forth in the Prospectuses, FAF is organized as a series fund,
and currently issues its shares in four series. Each series of shares represents
a separate investment portfolio with its own investment objective and policies
(in essence, a separate mutual fund). The series of FAF to which this Statement
of Additional Information relates are named on the cover hereof. These series
are referred to in this Statement of Additional Information as the "Funds."
Shareholders may purchase shares of each Fund through separate
classes. Prime Obligations Fund offers its shares in four classes, Class A,
Class B, Class Y and Class D. Treasury Obligations Fund, Government Obligations
Fund and Tax Free Obligations Fund offer their shares in three classes, Class A,
Class Y and Class D. The various classes provide for variations in distribution
costs, voting rights and dividends. To the extent permitted under the Investment
Company Act of 1940 (the "1940 Act"), the Funds may also provide for variations
in other costs among the classes although they have no present intention to do
so. Except for differences among the classes pertaining to distribution costs,
each share of each Fund represents an equal proportionate interest in that Fund.
FAF has prepared and will provide a separate Prospectus relating to
the Class A and Class B (the "Class A and Class B Shares Prospectus"), the Class
Y (the "Class Y Shares Prospectus") and the Class D Shares of the Funds (the
"Class D Shares Prospectus"), respectively. These Prospectuses can be obtained
by calling or writing SEI Investments Distribution Co. at the address and
telephone number set forth on the cover of this Statement of Additional
Information. This Statement of Additional Information relates to all
Prospectuses for the various classes of shares of the Funds. It should be read
in conjunction with the applicable Prospectus.
The Bylaws of FAF provide that meetings of shareholders be held only
with such frequency as required under Minnesota law and the 1940 Act. Minnesota
corporation law requires only that the Board of Directors convene shareholders'
meetings when it deems appropriate. In addition, Minnesota law provides that if
a regular meeting of shareholders has not been held during the immediately
preceding 15 months, a shareholder or shareholders holding 3% or more of the
voting shares of FAF may demand a regular meeting of shareholders by written
notice given to the chief executive officer or chief financial officer of FAF.
Within 30 days after receipt of the demand, the Board of Directors shall cause a
regular meeting of shareholders to be called, which meeting shall be held no
later than 40 days after receipt of the demand, all at the expense of FAF. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions, for approval of all investment
advisory contracts and amendments thereto, and for all amendments to Rule 12b-1
distribution plans.
INVESTMENT RESTRICTIONS
TREASURY OBLIGATIONS FUND
Treasury Obligations Fund has adopted the following investment
limitations and fundamental policies. These limitations cannot be changed by the
Fund without approval by the holders of a majority of the outstanding shares of
the Fund as defined in the 1940 Act (i.e., the lesser of the vote of (a) 67% of
the shares of the Fund at a meeting where more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the outstanding
shares of the Fund). Treasury Obligations Fund may not:
<PAGE>
1. Borrow money except that the Fund may borrow from banks
or enter into reverse repurchase agreements for
temporary or emergency purposes, for the purpose of
meeting redemption requests which might otherwise
require the untimely disposition of securities in
aggregate amounts not exceeding 10% of the value of the
Fund's total assets (including the amount borrowed or
subject to reverse repurchase agreements) valued at the
lesser of cost or market less liabilities (not including
the amount borrowed or subject to reverse repurchase
agreements) at the time the borrowing or reverse
repurchase agreement is entered into. Any borrowings
will be repaid before any additional investments are
made. During the period any reverse repurchase
agreements are outstanding, the Fund will restrict the
purchase of portfolio securities to instruments maturing
on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary
to assure completion of the reverse repurchase
agreements. Interest paid on borrowed funds will
decrease the net earnings of the Fund. The Fund will not
borrow or enter into reverse repurchase agreements to
increase income (leveraging).
2. Issue any senior securities (as defined in the 1940
Act), except as set forth in investment restriction
number (1) above, and except to the extent that
purchasing or selling on a when-issued, delayed delivery
or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior
security.
3. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 15% of the value of
its total assets but only to secure borrowings for
temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Underwrite the securities of other issuers except to the
extent the Fund may be deemed to be an underwriter,
under federal securities laws, in connection with the
disposition of portfolio securities.
6. Invest 25% or more of its assets in the securities of
issuers in any single industry; provided that there
shall be no limitation on the purchase of obligations
issued or guaranteed by the United States, its agencies
or instrumentalities, or obligations of domestic
commercial banks, excluding for this purpose, for
branches of domestic commercial banks.
7. Purchase or sell real estate, real estate investment
trust securities, commodities or commodity contracts, or
oil and gas interests.
8. Lend money to others except through the purchase of debt
obligations of the type which the Fund is permitted to
purchase (see "Investment Objectives and Policies" in
the Fund's Prospectus).
As a non-fundamental policy, Treasury Obligations Fund will not (i)
invest in oil, gas or other mineral leases and (ii) invest more than 10% of its
net assets in illiquid assets, including, without limitation, repurchase
agreements maturing in more than seven days.
As to investment restriction (6) above, utility companies, gas,
electric, water and telephone companies are considered separate industries, and
as to finance companies, the following two categories are each considered a
separate industry:
A. business credit institutions, such as Honeywell
Finance Corporation and General Electric Credit
Corp., and
<PAGE>
B. personal credit institutions, such as Sears
Roebuck Acceptance Corp. and Household Finance
Corporation.
GOVERNMENT OBLIGATIONS FUND
Government Obligations Fund has adopted the following investment
limitations and fundamental policies. These limitations cannot be changed by the
Fund without approval by the holders of a majority of the outstanding shares of
the Fund as defined in the 1940 Act. Government Obligations Fund may not:
1. Borrow money except from banks for temporary or emergency purposes
for the purpose of meeting redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of the Fund's total assets
(including the amount borrowed) valued at the lesser of cost or
market less liabilities (not including the amount borrowed) at the
time the borrowing is made. The borrowings will be repaid before any
additional investments are made. Interest paid on borrowed funds
will decrease the net earnings of the Fund. The Fund will not borrow
to increase income (leveraging).
2. Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to
the extent that purchasing or selling on a when-issued, delayed
delivery or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 15% of the value of its total assets but
only to secure borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Underwrite the securities of other issuers except to the extent the
Fund may be deemed to be an underwriter, under federal securities
laws, in connection with the disposition of portfolio securities.
6. Invest more than 10% of its net assets in illiquid assets,
including, without limitation, repurchase agreements maturing in
more than seven days.
7. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil or gas
interests.
8. Lend money to others except through purchase of debt obligations of
the type which the Fund is permitted to purchase (see "Investment
Objectives and Policies" in the Funds prospectus).
As a non-fundamental policy, Government Obligations Fund will not
invest in oil, gas or other mineral leases or real estate limited partnerships.
PRIME OBLIGATIONS FUND
Prime Obligations Fund has adopted the following investment
limitations and fundamental policies. These policies and limitations cannot be
changed by the Fund without approval by the holders of a majority of the
outstanding shares of the Fund as defined in the 1940 Act. Prime Obligations
Fund may not:
1. Purchase common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal
bonds, or industrial revenue bonds (except through the
<PAGE>
purchase of obligations referred to under "Investment Objectives and
Policies" in the Fund's Prospectus).
2. Borrow money except from banks for temporary or emergency purposes
for the purpose of meeting redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of the Fund's total assets
(including the amount borrowed) valued at the lesser of cost or
market less liabilities (not including the amount borrowed) at the
time the borrowing is made. The borrowings will be repaid before any
additional investments are made. However, even with such authority
to borrow money, there is no assurance that the Fund will not have
to dispose of securities on an untimely basis to meet redemption
requests.
3. Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (2) above, and except to
the extent that purchasing or selling on a when-issued, delayed
delivery or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
4. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 15% of the value of its total assets but
only to secure borrowings for temporary or emergency purposes.
5. Sell securities short or purchase securities on margin.
6. Write or purchase put or call options, except that the Fund may
write or purchase put or call options in connection with the
purchase of variable rate certificates of deposit described below.
7. Underwrite the securities of other issuers except to the extent the
Fund may be deemed to be an underwriter, under federal securities
laws, in connection with the disposition of portfolio securities, or
purchase securities with contractual or other restrictions on
resale.
8. Invest more than 10% of its net assets in illiquid assets,
including, without limitation, time deposits and repurchase
agreements maturing in more than seven days.
9. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas
interests.
10. Lend money to others except through the purchase of debt obligations
of the type which the Funds are permitted to purchase (see
"Investment Objectives and Policies" in the Fund's Prospectus).
11. Invest 25% or more of its assets in the securities of issuers in any
single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the United States,
its agencies or instrumentalities, or obligations of domestic
commercial banks, excluding for this purpose, foreign branches of
domestic commercial banks. As to utility companies, gas, electric,
water, and telephone companies are considered as separate
industries. As to finance companies, the following two categories
are each considered a separate industry: (A) business credit
institutions, such as Honeywell Finance Corporation and General
Electric Credit Corp., and (B) personal credit institutions, such as
Sears Roebuck Acceptance Corp. and Household Finance Corporation.
12. Invest in companies for the purpose of exercising control.
13. Purchase or retain the securities of any issuer if any of the
officers or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer
and together own more than 5% of the securities of such issuer.
<PAGE>
TAX FREE OBLIGATIONS FUND
Tax Free Obligations Fund has adopted the following investment
limitations and fundamental policies. These policies and limitations cannot be
changed by the Fund without approval by the holders of a majority of the
outstanding shares of the Fund as defined in the 1940 Act. Tax Free Obligations
Fund may not:
1. Purchase common stocks, preferred stocks, warrants,
other equity securities, corporate bonds or debentures,
state bonds, municipal bonds, or industrial revenue
bonds (except through the purchase of obligations
referred to under "Investment Objectives and Policies"
in the Fund's Prospectus).
2. Borrow money except from banks for temporary or
emergency purposes for the purpose of meeting redemption
requests which might otherwise require the untimely
disposition of securities. Borrowing in the aggregate
may not exceed 10% of the value of the Fund's total
assets (including the amount borrowed) valued at the
lesser of cost or market less liabilities (not including
the amount borrowed) at the time the borrowing is made.
The borrowings will be repaid before any additional
investments are made. However, even with such authority
to borrow money, there is no assurance that the Fund
will not have to dispose of securities on an untimely
basis to meet redemption requests. For the purpose of
this investment restriction, the use of options and
futures transactions and the purchase of securities on a
when-issued or delayed-delivery basis shall not be
deemed the borrowing of money. (As a fundamental policy,
the Fund will not make additional investments while its
borrowings exceed 5% of total assets).
3. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 15% of the value of
its total assets but only to secure borrowings for
temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Write or purchase put or call options, except that the
Fund may write or purchase put or call options in
connection with the purchase of variable rate
certificates of deposit described below and as otherwise
permitted as provided in the Fund's Prospectus.
6. Underwrite the securities of other issuers except to the
extent the Fund may be deemed to be an underwriter,
under federal securities laws, in connection with the
disposition of portfolio securities, or purchase
securities with contractual or other restrictions on
resale.
7. Purchase or sell real estate, real estate investment
trust securities, commodities or commodity contracts, or
oil and gas interests.
8. Lend money to others except through the purchase of debt
obligations of the type which the Fund is permitted to
purchase (see "Investment Objectives and Policies" in
the Fund's Prospectus).
9. Invest in companies for the purpose of exercising
control.
10. Issue any senior securities (as defined in the 1940
Act), except as set forth in investment restriction
number (2) above, and except to the extent that using
options, futures contracts and options on futures
contracts, purchasing or selling on a when-issued,
delayed delivery or forward commitment basis or using
similar investment strategies may be deemed to
constitute issuing a senior security.
<PAGE>
11. Invest 25% or more of its total assets in the securities
of any industry; provided that there shall be no
limitation on the purchase of obligations issued or
guaranteed by the United States, its agencies or
instrumentalities, or obligations of domestic commercial
banks, excluding for this purpose, foreign branches of
domestic commercial banks. As to utility companies, gas,
electric, water, and telephone companies are considered
as separate industries. As to finance companies, the
following two categories are each considered a separate
industry: (A) business credit institutions, such as
Honeywell Finance Corporation and General Electric
Credit Corp., and (B) personal credit institutions, such
as Sears Roebuck Acceptance Corp. and Household Finance
Corporation.
As a non-fundamental policy, Tax Free Obligations Fund may not
purchase or retain the securities of any issuer if any of the officers or
directors of the Fund or its investment adviser owns beneficially more than 1/2
of 1% of the securities of such issuer and together own more than 5% of the
securities of such issuer.
As a non-fundamental policy, Tax Free Obligations Fund may not
invest more than 10% of its net assets in illiquid assets, including, without
limitation, time deposits and repurchase agreements maturing in more than seven
days.
In connection with Prime Obligation Fund's and Tax Free Obligations
Fund's purchase of variable rate certificates of deposit ("CDs"), it may enter
into agreements with banks or dealers allowing the Fund to resell the
certificates to the bank or dealer, at the Fund's option. Time deposits which
may be purchased by such Fund are deposits held in foreign branches of United
States banks which have a specified term or maturity. The Funds purchase CDs
from only those domestic savings and loan institutions which are regulated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
("FDIC"), and whose deposits are insured by either the Savings Association
Insurance Fund or the Bank Insurance Fund, each of which is administered by the
FDIC. However, because such Fund purchases large denomination CDs, it does not
expect to benefit materially from such insurance. The policies described in this
paragraph are non-fundamental and may be changed by the Board of Directors.
Prime Obligations Fund and Tax Free Obligations Fund may invest in
obligations of foreign branches of United States banks and United States
branches of foreign banks. The obligations of foreign branches of United States
banks may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by
governmental regulation. Payment of interest and principal upon these
obligations may also be affected by governmental action in the country of
domicile of the branch (generally referred to as sovereign risk). In addition,
evidences of ownership of portfolio securities may be held outside of the United
States and the Funds may be subject to the risks associated with the holding of
such property overseas. Various provisions of federal law governing the
establishment and operation of domestic branches do not apply to foreign
branches of domestic banks. Obligations of United States branches of foreign
banks may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by federal
and state regulation as well as by governmental action in the country in which
the foreign bank has its head office.
The Funds may not invest in obligations of any affiliate of U.S.
Bancorp, including U.S. Bank National Association (the "Advisor").
The Funds may lend securities to the extent described in the
Prospectuses under "Investment Restrictions and Techniques -- Lending of
Portfolio Securities." When a Fund lends portfolio securities, it continues to
be entitled to the interest payable on the loaned securities and, in addition,
receives interest on the amount of the loan at a rate negotiated with the
borrower. The Fund may pay a portion of the income earned on the lending
transaction to the placing broker and may pay administrative and
<PAGE>
custodial fees in connection with these loans. As set forth in the Prospectuses,
U.S. Bank National Association, the Funds' custodian ("U.S. Bank"), may act as
securities lending agent for the Funds and receive separate compensation for
such services, subject to compliance with conditions contained in a Securities
and Exchange Commission exemptive order permitting U.S. Bank to provide such
services and receive such compensation.
Short-term investments and repurchase agreements may be entered into
on a joint basis by the Funds and other funds advised by the Advisor to the
extent permitted by Securities and Exchange Commission exemptive order.
CFTC INFORMATION
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity pursuant to the Commodity Exchange Act, as
amended. The CFTC requires the registration of "commodity pool operators," which
are defined as any person engaged in a business which is of the nature of an
investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which (i) will use commodity
futures or commodity options contracts solely for bona fide hedging purposes
(provided, however, that in the alternative, with respect to each long position
in a commodity future or commodity option contract, an investment company may
meet certain other tests set forth in Rule 4.5); (ii) will not enter into
commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of its assets; (iii) will not be marketed
to the public as a commodity pool or as a vehicle for investing in commodity
interests; (iv) will disclose to its investors the purposes of and limitations
on its commodity interest trading; and (v) will submit to special calls of the
CFTC for information. Any investment company desiring to claim this exclusion
must file a notice of eligibility with both the CFTC and the National Futures
Association. FAF has made such notice filings with respect to those Funds which
may invest in commodity futures or commodity options contracts.
PORTFOLIO TURNOVER
The Funds generally intend to hold their portfolio securities to
maturity. In certain instances, however, a Fund may dispose of its portfolio
securities prior to maturity when it appears such action will be in the best
interest of the Fund because of changing money market conditions, redemption
requests, or otherwise. A Fund may attempt to maximize the total return on its
portfolio by trading to take advantage of changing money market conditions and
trends or to take advantage of what are believed to be disparities in yield
relationships between different money market instruments. Because each Fund
invests in short-term securities and manages its portfolio as described above in
"Investment Restrictions" and as described in the Prospectus under "Investment
Objectives and Policies," the Fund's portfolio will turn over several times a
year. Because brokerage commissions as such are not usually paid in connection
with the purchase or sale of the securities in which the Funds invest and
because the transactional costs are small, the high turnover is not expected
materially to affect net asset values or yields. Securities with maturities of
less than one year are excluded from required portfolio turnover rate
calculations, and, therefore, each Fund's turnover rate for reporting purposes
will be zero.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of FAF are listed below,
together with their business addresses and their principal occupations during
the past five years. Directors who are "interested persons" (as that term is
defined in the 1940 Act) of FAF are identified with an asterisk.
DIRECTORS
Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FAF since December 1994 and of First American Investment Funds, Inc.
("FAIF") since September 1994 and of First American Strategy Funds, Inc.
("FASF") since June 1996; Chairman (1989-1993) and Chief Executive Officer
(1993-present), Okabena Company (private family investment office). Age: 54.
Roger A. Gibson, 1020 15th Street, Ste. 41A, Denver, Colorado 80202:
Director of FAF, FAIF and FASF since October 1997; Vice President North
America-Mountain Region for United Airlines since June 1995; prior to his
current position, served most recently as Vice President Customer Service for
United Airlines in the West Region in San Francisco and the Mountain Region in
Denver, Colorado; employee at United Airlines since 1967. Age: 51.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and services management company, since
1975. Age: 49.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAF and FAIF since November 1993 and of FASF since June 1996;
President and owner of Executive Management Consulting, Inc., a management
consulting firm; Vice President, Chief Financial Officer, Treasurer, Secretary
and Director of Anderson Corporation, a large privately-held manufacturer of
wood windows, from 1983 to October 1992. Age: 55.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center,
Minnesota 55429: Director of FAIF, FAF and FASF since January 31, 1997; employed
by First Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most
recently as Vice President, First Bank National Association. Age: 62.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991 and of
FASF since June 1996; Chairman of FAF's and FAIF's Boards from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987 and of FAF since April 1991 and of FASF since
June 1996; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.
EXECUTIVE OFFICERS
Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Acting President, Vice President and Assistant Secretary of FAIF and FAF since
April 1994 and of FASF since June 1996; Vice President and Assistant Secretary
of the Administrator and the Distributor since April 1994; Associate, Morgan,
Lewis & Bockius, from 1989 to 1994. Age: 38.
<PAGE>
Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FAIF and FAF since November 1992 and of
FASF since June 1996; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"), SEI Investments
Management Corporation (the "Administrator") and the Distributor since 1981.
Age: 53.
Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since April 1994 and of
FASF since June 1996; Vice President, Assistant Secretary and General Counsel of
the Administrator and the Distributor. Age: 37.
Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF and FAF since 1992 and of FASF
since June 1996; Vice President and Assistant Secretary of SEI, the
Administrator and the Distributor since 1983. Age: 41.
Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FAIF, FAF and FASF since December
1996; Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.
Joseph M. O'Donnell, Vice President and Assistant Secretary of FAIF,
FAF and FASF beginning in February 1998; Vice President and Assistant Secretary
of the Administrator and Distributor since January 1998; Vice President and
General Counsel, FPS Services, Inc. from 1993 to 1997; Staff Counsel and
Secretary, Provident Mutual Family of Funds from 1990 to 1993. Age: 42.
Michael G. Beattie, SEI Investments Company, Oaks, Pennsylvania
19456: Controller of FAIF, FAF and FASF since December 1997; Associate Director,
Fund Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (1993-1997);
Registered Representative, First Investors, from 1988 to 1990. Age: 32.
Lydia A. Gavalis, SEI Investmants Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice President
and Assistant Secretary of the Administrator and the Distributor each since
January 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998. Age: 33
Lynda J. Streigel, SEI Investments Company, Oaks, Pennsylvania
19456; Vice President and Assistant Secretary of FAIF, FAF and FASF, and Vice
President and Assistant Secretary of the Administrator and the Distributor since
January 1998; Senior Asset Management Counsel, Barnett Banks, Inc. from 1993 to
1997; Partner, Groom and Nordberg, Chartered from 1996 to 1997; and Associate
General Counsel, Riggs Bank, N.A. from 1992 to 1995. Age: 49
Kathy Heilig, SEI Investments Company, Oaks, Pennsylvania 19456;
Vice President and Assistant Secretary of FAIF, FAF and FASF, and Treasurer of
SEI Investments Company since 1997; Assistant Controller of SEI Investments
Company from 1995 to 1997; and Vice President of SEI Investments Company from
1991 to 1995. Age: 39.
Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FAIF since April 1991 and of FAF since 1981 and of FASF
since June 1996; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FAIF, FAF and FASF. Age: 52.
<PAGE>
COMPENSATION
The First American Family of Funds, which includes FAF, FAIF and
FASF, currently pays only to directors of the funds who are not paid employees
or affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or a committee chair). In addition, directors may receive a
per diem fee of $1,000 per day plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out of town Board or
committee meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FAF, FAIF and FASF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FAF (i) by FAF (column 2), and (ii) by
FAF, FAIF and FASF collectively (column 5) during the fiscal year ended
September 30, 1997. No executive officer or affiliated person of FAF had
aggregate compensation from FAF in excess of $60,000 during such fiscal year:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total
Compensation
Aggregate Pension or Retirement Estimated From Registrant
Name of Compensation Benefits Accrued as Annual Benefits and Fund Complex
Person, Position (1) From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
- ------------------------------ --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $20,802 -0- -0- $33,500
Roger A. Gibson, Director * -0- -0- -0- -0-
Andrew M. Hunter III, Director $14,145 -0- -0- $23,250
Leonard W. Kedrowski, Director $20,347 -0- -0- $32,700
Robert L. Spies, Director $14,660 -0- -0- $24,050
Joseph D. Strauss, Director $24,878 -0- -0- $39,925
Virginia L. Stringer, Director $24,581 -0- -0- $39,925
</TABLE>
- --------------------------
*Not a director during the fiscal year ended September 30, 1997.
(1) Gae B. Veit resigned as a director of FAIF, FASF and FAF on September 12,
1997.
Under Minnesota law, each director 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 in a manner reasonably believed to be in the best interest 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). In 1987,
Minnesota enacted legislation which 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 (a) for any breach of the director's duty of "loyalty"
to the corporation or its shareholders, (b) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of the law,
(c) for authorizing a dividend, stock repurchase or redemption, or other
distribution in violation of Minnesota law or for
<PAGE>
violation of certain provisions of Minnesota securities laws, or (d) for any
transaction from which the director derived an improper personal benefit. FAF's
Board of Directors and shareholders, at meetings held December 10, 1987 and
March 15, 1988, respectively, approved an amendment to the Articles of
Incorporation that limits the liability of directors to the fullest extent
permitted by the Minnesota legislation and the 1940 Act.
Minnesota law does not eliminate the duty of "care" imposed on a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Further, Minnesota law does not permit elimination or
limitation of liability of "officers" to the corporation 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. These remedies, however, may be ineffective in situations where
shareholders become aware of such a breach after a transaction has been
consummated and rescission has become impractical. Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended. The 1940
Act prohibits elimination or limitation of a director's liability for acts
involving willful malfeasance, bad faith, gross negligence, or reckless
disregard of the duties of a director.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR
U.S. Bank National Association (the "Advisor"), 601 Second Avenue
South, Minneapolis, Minnesota 55402, serves as the investment advisor and
manager of the Funds through its First American Asset Management group. The
Advisor is a national banking association that has professionally managed
accounts for individuals, insurance companies, foundations, commingled accounts,
trust funds, and others for over 75 years. The Advisor is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55402, which is
a regional, multi-state bank holding company headquartered in Minneapolis,
Minnesota. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997 on a pro forma
combined basis, USB and consolidated subsidiaries had consolidated assets of
approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.
Pursuant to an Investment Advisory Agreement, effective as of
January 20, 1995 (the "Advisory Agreement") between FAF, on behalf of each Fund,
and the Advisor, the Funds engage the Advisor to act as investment adviser for
and to manage the investment of the Funds' assets. The Advisory Agreement
requires each Fund to pay the Advisor a monthly fee equal, on an annual basis,
to .40 of 1% of the Fund's average daily net assets.
The Advisory Agreement requires the Advisor to arrange, if requested by
FAF, for officers or employees of the Advisor to serve without compensation from
the Funds as directors, officers, or employees of FAF if duly elected to such
positions by the shareholders or directors of FAF. The Advisor has the authority
and responsibility to make and execute investment decisions for the Funds within
the framework of the Funds' investment policies, subject to review by the Board
of Directors of FAF. The Advisor is also responsible for monitoring the
performance of the various organizations providing services to the Funds,
including the Funds' distributor, shareholder services agent, custodian, and
accounting agent, and for periodically reporting to FAF's Board of Directors on
the performance of such organizations. The Advisor will, at its own expense,
furnish the Funds with the necessary personnel, office facilities, and equipment
to service the Funds' investments and to discharge its duties as investment
adviser of the Funds. In addition to the investment advisory fee, each Fund pays
all of its expenses that are not expressly assumed by the Advisor or any other
organization with which the Fund may enter into an agreement for the performance
of services. Each Fund is liable for such nonrecurring expenses as may arise,
including litigation to which the Fund may be a party. FAF may
<PAGE>
have an obligation to indemnify its directors and officers with respect to such
litigation. The Advisor will be liable to the Funds under the Advisory Agreement
for any negligence or willful misconduct by the Advisor other than liability for
investments made by the Advisor in accordance with the explicit direction of the
Board of Directors or the investment objectives and policies of the Funds. The
Advisor has agreed to indemnify the Funds with respect to any loss, liability,
judgment, cost or penalty that a Fund may suffer due to a breach of the Advisory
Agreement by the Advisor.
The following table sets forth total advisory fees before waivers
and after waivers for each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30,1995 September 30, 1996 September 30, 1997
---------------------------- ---------------------------- ----------------------------
Advisory Fee Advisory Fee Advisory Fee Advisory Fee Advisory Fee Advisory Fee
Before After Before After Before After
Waivers Waivers Waivers Waivers Waivers Waivers
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Treasury Obligations Fund........... $3,995,741 $3,094,023 $6,253,637 $4,688,746 $12,432,597 $9,904,279
Government Obligations Fund......... 2,880,555 2,134,664 3,821,969 3,007,413 4,856,530 4,020,449
Prime Obligations Fund ............. 7,153,924 5,037,203 11,293,845 8,866,700 14,885,761 12,400,673
Tax Free Obligations Fund (1)....... -- -- -- -- 46,188 1,174
</TABLE>
(1) Information is for the four month period from August 1, 1997 to November
30, 1997.
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor" ) serves as the
distributor for the Class A, Class B, Class Y and Class D Shares of the Funds.
The Distributor is a wholly-owned subsidiary of SEI Investments Company, which
also owns the Funds' Administrator. See "-- Custodian: Administrator; Transfer
Agent; Counsel; Accountants" below.
The Distributor serves as distributor for the Class A, Class Y and
Class D Shares pursuant to a Distribution Agreement effective as of January 20,
1995 between itself and the Funds, and as the distributor for the Class B Shares
pursuant to a Distribution and Service Agreement dated January 20, 1995 (the
"Class B Distribution Agreement") between itself and the Funds. These agreements
are referred to collectively as the "Distribution Agreements."
Under the Distribution Agreements, the Distributor has agreed to
perform all distribution services and functions of the Funds to the extent such
services and functions are not provided to the Funds pursuant to another
agreement. The shares of the Funds are distributed through the Distributor and
through securities firms, financial institutions (including, without limitation,
banks) and other industry professionals (the "Participating Institutions") which
enter into sales agreements with the Distributor to perform share distribution
or shareholder support services.
U.S. Bancorp Investment Services, Inc. ("USBI"), a subsidiary of the
Advisor, and U.S. Bancorp Piper Jaffray Inc., a broker-dealer affiliated with
the Advisor, are Participating Institutions. The Advisor pays USBI and U.S.
Bancorp Piper Jaffray Inc., up to .25% of the portion of each Fund's average
daily net assets attributable to Class Y Shares for which USBI or U.S. Bancorp
Piper Jaffray Inc., are responsible, respectively, in connection with USBI's
provision of shareholder support services. Such amounts paid to USBI and
<PAGE>
U.S. Bancorp Piper Jaffray Inc., by the Advisor will not affect the Advisor's
agreement to limit expenses of each Fund as discussed under "Management of the
Funds -- Investment Advisor" in the Prospectuses.
The Class A Shares pay to the Distributor a shareholder servicing
fee at an annual rate of 0.25% of the average daily net assets of the Class A
Shares, which fee may be used by the Distributor to provide compensation for
shareholder servicing activities with respect to the Class A Shares of the kinds
described in the Class A and Class B Shares Prospectus. This fee is calculated
and paid each month based on average daily net assets of Class A of each Fund
for that month.
The Class B Shares pay to the Distributor a distribution fee at an
annual rate of 0.75% of the average daily net assets of the Class B Shares,
which fee may be used by the Distributor to provide compensation for sales
support and distribution activities with respect to the Class B Shares. This fee
is calculated and paid each month based on average daily net assets of Class B
Shares for that month. In addition to this fee, the Distributor is paid a
shareholder servicing fee at an annual rate of 0.25% of the average daily net
assets of Prime Obligations Fund's Class B Shares pursuant to the Class B
Distribution Agreement and a service plan (the "Class B Service Plan"), which
fee may be used by the Distributor to provide compensation for shareholder
servicing activities with respect to the Class B Shares of the Prime Obligations
Fund of the kinds described in the Class A and Class B Shares Prospectus. The
Distributor also receives any contingent deferred sales charges paid with
respect to sales of Class B Shares.
The Distributor receives no compensation for distribution of the
Class Y Shares. The Class D Shares of each Fund pay a shareholder servicing fee
to the Distributor monthly at the annual rate of 0.15% of each Fund's Class D
average daily net assets, which fee may be used by the Distributor to provide
compensation for shareholder servicing activities with respect to the Class D
Shares of the kinds described in the Class D Shares Prospectus. This fee is
calculated and paid each month based on average daily net assets of Class D of
each Fund for that month.
The Distribution Agreements provide that they will continue in
effect for a period of more than one year from the date of their execution only
so long as such continuance is specifically approved at least annually by the
vote of a majority of the Board members of FAF and by the vote of the majority
of those Board members of FAF who are not interested persons of FAF and who have
no direct or indirect financial interest in the operation of FAF's Rule 12b-1
Plans of Distribution or in any agreement related to such Plans.
FAF has adopted Plans of Distribution (the "Plans") with respect to
Class A, Class B and Class D Shares of the Funds, respectively, pursuant to Rule
12b-1 under the 1940 Act. Rule 12b-1 provides in substance that a mutual fund
may not engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of shares, except pursuant to a plan
adopted under the Rule. The Plans authorize the Funds to pay the Distributor
fees for the services it performs for the Funds as described in the preceding
paragraphs. The Class B Plan also authorizes the Distributor to retain the
contingent deferred sales charge applied on redemptions of Class B Shares. The
Plans recognize that the Advisor, the Administrator, the Distributor, and any
Participating Institution, in their discretion, may use their own assets to pay
for certain additional costs of distributing shares of the Funds. Any such
arrangement to pay such additional costs may be commenced or discontinued by the
Advisor, the Administrator, the Distributor, or any Participating Institution at
any time.
Each Plan is a "compensation-type" plan under which the Distributor
is entitled to receive the distribution fee regardless of whether its actual
distribution expenses are more or less than the amount of the fee. If, after
payments by the Distributor for advertising, marketing, and distribution, there
are any remaining fees, these may be used as the Distributor may elect. Because
the amounts payable under the Plans will be commingled with the Distributor's
general funds, including the revenues it receives in the conduct of its
business, it is possible that certain of the Distributor's overhead expenses
will be paid out of Plan fees and that these expenses may include items which
the SEC Staff has noted, for example,
<PAGE>
the costs of leases, depreciation, communications, salaries, training, and
supplies. The Funds believe that such expenses, if paid, will be paid only
indirectly out of the fees being paid under the Plans.
The following tables set forth the total Rule 12b-1 fees, after
waivers, paid by each class of the Funds for the fiscal years ended September
30, 1995, September 30, 1996 and September 30, 1997:
YEAR ENDED SEPTEMBER 30, 1995
CLASS A CLASS B CLASS Y CLASS D
------- ------- ------- -------
Treasury Obligations Fund........... * * $0 $0
Government Obligations Fund......... * * 0 *
Prime Obligations Fund.............. * * 0 *
Tax Free Obligations Fund........... * * * *
YEAR ENDED SEPTEMBER 30, 1996
CLASS A CLASS B CLASS Y CLASS D
------- ------- ------- -------
Treasury Obligations Fund........... * * * $982,300
Government Obligations Fund......... * * $0 199,644
Prime Obligations Fund.............. $140,285 $92 0 6,634
Tax Free Obligations Fund........... * * * *
YEAR ENDED SEPTEMBER 30, 1997
CLASS A CLASS B CLASS Y CLASS D
------- ------- ------- -------
Treasury Obligations Fund........... * * $0 $3,609,010
Government Obligations Fund......... * * 0 484,747
Prime Obligations Fund.............. $317,080 $7,227 0 222,621
Tax Free Obligations Fund (1)....... 39,839 * 4,123 *
- ---------------------
* Fund was not in operation during this fiscal year.
(1) Information is for the period from August 1, 1997 to November 30, 1997. Of
these amounts, $38,857 and $4,123 are distribution fees from the Class A
and Class Q shares of the Qualivest Tax-Free Obligations Fund,
respectively. On November 25, 1997 Tax Free Obligations Fund acquired the
assets of the Qualivest Tax-Free Money Market Fund. In connection with
such acquisition, Class A shares of the Qualivest Tax-Free Money Market
Fund were exchanged for Class A shares of Tax Free Obligations Fund, and
Class Q and Y shares of the Qualivest Tax-Free Money Market Fund were
exchanged for Class C Shares (now designated Class Y Shares) of Tax Free
Obligations Fund.
CUSTODIAN; ADMINISTRATOR; TRANSFER AGENT; COUNSEL; ACCOUNTANTS
U.S. Bank National Association (the "Custodian") acts as custodian
of the Funds' assets and portfolio securities pursuant to a Custodian Agreement
between First Trust National Association and the Funds. First Trust's rights and
obligations under the Custodian Agreement were assigned to U.S. Bank pursuant to
an Assignment and Assumption Agreement between First Trust and U.S. Bank. The
Custodian takes no part in determining the investment policies of the Funds or
in deciding which securities are purchased or sold by the Funds. The duties of
the Custodian are limited to receiving and safeguarding the assets and
securities of the Funds and to delivering or disposing of them pursuant to
<PAGE>
the Funds' order. The Funds compensate the Custodian at such rates and at such
times as the Funds and the Custodian may agree on in writing from time to time,
and the Custodian is granted a lien for unpaid compensation upon any cash or
securities held by it for the Funds.
The following table sets forth total custodian fees, after waivers,
paid by each of the Funds for the fiscal years ended September 30, 1995,
September 30, 1996, and September 30, 1997:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30,1995 September 30, 1996 September 30, 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Treasury Obligations
Fund...................... $281,166 $467,928 $ 932,086
Government Obligations
Fund...................... 216,267 278,285 358,464
Prime Obligations Fund ........ 537,494 842,325 1,107,820
Tax Free Obligations
Fund (1).................. -- -- 1,000
</TABLE>
(1) For the four month period from August 1, 1997 to November 30, 1997.
The Administrator, a wholly-owned subsidiary of SEI Investments
Company, provides administrative services to the Funds for a fee as described in
the prospectus. The following table sets forth total administrative fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1995, September 30, 1996, and September 30, 1997:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30,1995 September 30, 1996 September 30, 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Treasury Obligations
Fund...................... $656,081 $1,076,226 $1,976,528
Government Obligations
Fund...................... 504,095 659,381 775,846
Prime Obligations
Fund...................... 1,251,489 1,945,261 2,375,994
Tax Free Obligations
Fund (1).................. -- -- 16,689
</TABLE>
(1) For the four month period from August 1, 1997 to November 30, 1997.
DST Systems, Inc., 330 West Ninth Street, Kansas City, Missouri
64105, is transfer agent and dividend disbursing agent for the shares of the
Funds. The transfer agent is not affiliated with the Distributor, the
Administrator or the Adviser.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent general counsel for the Funds.
<PAGE>
KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis,
Minnesota 55402, serves as the Funds' independent auditors, providing audit
services, including audits of the annual financial statements and assistance and
consultation in connection with SEC filings.
PORTFOLIO TRANSACTIONS
As the Funds' portfolios are exclusively composed of debt, rather
than equity securities, most of the Funds' portfolio transactions are effected
with dealers without the payment of brokerage commissions but at net prices,
which usually include a spread or markup. In effecting such portfolio
transactions on behalf of the Funds, the Advisor seeks the most favorable net
price consistent with the best execution. The Advisor may, however, select a
dealer to effect a particular transaction without communicating with all dealers
who might be able to effect such transaction because of the volatility of the
money market and the desire of the Advisor to accept a particular price for a
security because the price offered by the dealer meets guidelines for profit,
yield, or both.
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Advisor. The primary consideration in making these
decisions is efficiency in executing orders and obtaining the most favorable net
prices for the Funds. Most Fund transactions are with the issuer or with major
dealers acting for their own account and not as brokers. When consistent with
these objectives, business may be placed with broker-dealers who furnish
investment research services to the Advisor. Such research services would
include advice, both directly and in writing, as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities, as well as
analyses and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy, and the performance of accounts.
The research services may allow the Advisor to supplement its own
investment research activities and enable the Advisor 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, the Advisor would receive a benefit, which is not capable of
evaluation in dollar amounts, without providing any direct monetary benefit to
the Funds from these transactions.
The Advisor has not entered into any formal or informal agreements
with any broker-dealers, and does not maintain any "formula" that must be
followed in connection with the placement of Fund portfolio transactions in
exchange for research services provided to the Advisor, except as noted below.
The Advisor may, from time to time, maintain an informal list of broker-dealers
that will be used as a general guide in the placement of Fund business in order
to encourage certain broker-dealers to provide the Advisor with research
services, which the Advisor anticipates will be useful to it. Any list, if
maintained, would be merely a general guide, which would be used only after the
primary criteria for the selection of broker-dealers (discussed above) has been
met, and, accordingly, substantial deviations from the list could occur. While
it is not expected that any Fund will pay brokerage commissions, if it does, the
Advisor would authorize the 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 Advisor determined in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the overall responsibilities of the
Advisor with respect to the Funds.
No Fund effects brokerage transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with its Advisor or
Distributor unless such transactions, including the frequency thereof, the
receipt of commissions payable in connection therewith, and the selection of the
affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Fund, as determined by the Board of
Directors. Any transactions with an affiliated broker-dealer must be on terms
that are both at least as favorable to the Fund as such Fund can obtain
elsewhere and at least as favorable as such affiliate broker-dealer normally
gives to others.
<PAGE>
When two or more clients of the Advisor are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts are
allocated in accordance with a formula considered by the Advisor to be equitable
to each client. In some cases, this system could have a detrimental effect on
the price or volume of the security as far as each client is concerned. In other
cases, however, the ability of the clients to participate in volume transactions
will produce better executions for each client.
During the fiscal year ended September 30, 1997, Treasury
Obligations Fund, Government Obligations Fund, and Prime Obligations Fund paid
brokerage commissions to SEI Investments Distribution Co. ("SIDCO") totalling
$17,473.03, $19,397.43, and $18,435.93, respectively, in connection with
portfolio transactions transacted through SIDCO. SIDCO also acts as the Funds'
Distributor and is under common control with the Funds' Administrator. These
commissions represented 100% of the aggregate brokerage commissions paid by each
Fund during the fiscal year. Transactions effected by Treasury Obligations Fund,
Government Obligations Fund, and Prime Obligations Fund through SIDCO
represented 100% of the aggregate dollar amount of transactions involving the
payment of commissions effected by each of these Funds during the fiscal year.
At September 30, 1997, Prime Obligations Fund held securities of
broker-dealers which are deemed to be "regular brokers or dealers" of the Funds
under the 1940 Act (or of such broker-dealers' parent companies) in the
following amounts: Bankers Trust certificate of deposit, $34,981,084; Bankers
Trust note, $105,000,000; Bear Stearns commercial paper, $24,938,556; First
Boston commercial paper, $24,923,472; Goldman Sachs note, $3,003,573; and Morgan
Stanley medium term note, $75,000,000.
<PAGE>
CAPITAL STOCK
As of December 1, 1997, the directors of FAF owned shares of FAF,
FAIF and FASF with an aggregate net asset value of $3,596,000. As of January 14,
1998, the directors and officers of FAF as a group owned less than one percent
of each class of each Fund's outstanding shares. As of that date, the Funds were
aware that the following persons owned of record five percent or more of the
outstanding shares of each class of stock of the Funds.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
----------------------------------------
CLASS A CLASS B CLASS Y CLASS D
------- ------- ------- -------
TREASURY OBLIGATIONS FUND
<S> <C> <C> <C> <C>
BHC Securities, Inc.................................................... 99.70%
2005 Market St.
Philadelphia, PA 19103-7042
VAR & Co............................................................... 81.92%
First Trust National Assn.
P.O. Box 64010
St. Paul, MN 55164-0010
Special Custody Account for the exclusive benefit of customers of FBS
Investment Services, Inc. ........................................... 16.26%
Attn: Money Fund Unit R/R
100 South Fifth St., Suite 1400
Minneapolis, MN 55402-1217
VAR & Co............................................................... 99.53%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
GOVERNMENT OBLIGATIONS FUND
Special Custody Account for the exclusive benefit of customers of FBS
Investment Services, Inc. ........................................... 49.42%
Attn: Money Fund Unit R/R
100 South Fifth St., Suite 1400
Minneapolis, MN 55402-1217
VAR & Co............................................................... 45.49%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
VAR & Co............................................................... 98.64%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
PRIME OBLIGATIONS FUND
BHC Securities, Inc.................................................... 42.72%
2005 Market St.
Philadelphia, PA 19103-7042
Special Custody Account for the exclusive benefit of customers of FBS
Investment Services, Inc. ........................................... 29.20%
Attn: Money Fund Unit R/R
100 South Fifth St., Suite 1400
Minneapolis, MN 55402-1217
National Financial Services Corporation
for the exclusive benefit of our customers........................... 25.50%
P.O. Box 3752
Church Street Station
New York, NY 10008-3752
<PAGE>
PERCENTAGE OF OUTSTANDING SHARES
----------------------------------------
CLASS A CLASS B CLASS Y CLASS D
------- ------- ------- -------
NFSC FEBO # 03M-862193................................................. 6.14%
First Bank NA Cust
IRA of Russell C. Eidal
320 Bluff Drive
Lowell, AR 72745-9117
NFSC FEBO # 03M-817783................................................. 5.56%
First Bank NA Cust
IRA of Donald M. Haas
510 Alvarado Lane
Plymouth, MN 55447-3327
NFSC FEBO # 03M-516724................................................. 5.47%
Judi L. Brink
T/O/D et al
5018 Picket Drive
Colorado Springs, CO 80918-3618
VAR & Co............................................................... 55.83%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
Special Custody Account for the exclusive benefit of customers of FBS
Investment Services, Inc. ........................................... 32.80%
Attn: Money Fund Unit R/R
100 South Fifth St., Suite 1400
Minneapolis, MN 55402-1217
Telco.................................................................. 6.44%
Attn: Trust Mutual Funds
P.O. Box 3168
Portland, OR 97208-3168
VAR & Co............................................................... 99.98%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
TAX FREE OBLIGATIONS FUND
BHC Securities, Inc.................................................... 97.91%
Trade House Account - Retail
One Commerce Square
Attn: Sweeps Department
2005 Market St.
Philadelphia, PA 19103-7042
SEI Corporation........................................................ 100.00%
Attn: Rob Silvestri
One Freedom Valley Dr.
Oaks, PA 19456
VAR & Co............................................................... 74.57%
First Trust National Assn.
Attn: Mutual Funds Unit
P.O. Box 64010
St. Paul, MN 55164-0010
Telco.................................................................. 21.33%
C/O U.S. Bank of Oregon - Trust
555 S.W. Oak
Portland, O 97204-1752
</TABLE>
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the applicable Prospectuses. Each Fund is open for business and
its net asset value per share is calculated on every day the New York Stock
Exchange and federally-chartered banks are open for business. The New York Stock
Exchange is not open for business on the following holidays (or on the nearest
Monday or Friday if the holiday falls on a weekend): New Year's Day, Martin
Luther King, Jr. Day, Washington's Birthday (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day. Each year the New York Stock Exchange may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future. To the extent that the securities of a Fund are traded on days that
the Fund is not open for business, the Funds' net asset value per share may be
affected on days when investors may not purchase or redeem shares. On September
30, 1997, the net asset value per share for the Funds was calculated as follows:
<TABLE>
<CAPTION>
NET ASSET
NET ASSETS SHARES VALUE PER SHARE
(IN DOLLARS) / OUTSTANDING = (IN DOLLARS)
------------ ----------- ------------
<S> <C> <C> <C>
TREASURY OBLIGATIONS FUND
Class A........................ * * *
Class Y........................ $897,796,543 / 897,798,054 = $1.00
Class D........................ 2,847,215,098 / 2,847,200,292 = 1.00
GOVERNMENT OBLIGATIONS FUND
Class A........................ * * *
Class Y........................ 946,195,887 / 946,221,708 = 1.00
Class D........................ 337,199,447 / 337,210,778 = 1.00
PRIME OBLIGATIONS FUND
Class A........................ 218,260,656 / 218,262,281 = 1.00
Class B........................ 2,018,329 / 2,202,273 = 1.00
Class Y........................ 3,615,873,449 / 3,615,864,191 = 1.00
Class D........................ 113,063,854 / 113,070,148 = 1.00
TAX FREE OBLIGATIONS FUND (1)
Class A........................ 10,703,018 / 10,704,539 = 1.00
Class Y........................ 26,662,179 / 28,664,406 = 1.00
Class D........................ 1,000 / 1,000 = 1.00
</TABLE>
* Not operation during fiscal year ended September 30, 1997.
(1) Net asset value is as of November 30, 1997.
VALUATION OF PORTFOLIO SECURITIES
The Funds' portfolio securities are valued on the basis of the
amortized cost method of valuation. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Fund would receive if it sold the instrument.
During periods of declining interest rates, the
<PAGE>
daily yield on shares of a Fund computed as described above may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by a Fund resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Fund would be able to obtain a somewhat higher yield
than would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The valuation of the Funds' portfolio instruments based upon their
amortized cost and the concomitant maintenance of the Funds' per share net asset
value of $1.00 is permitted in accordance with Rule 2a-7 under the 1940 Act,
under which the Funds must adhere to certain conditions. The Funds must maintain
a dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less from the date of
purchase, and invest only in securities determined by the Board of Directors to
present minimal credit risks and which are of high quality as determined by
major rating services, or, in the case of any instrument which is not so rated,
which are of comparable quality as determined by the Board of Directors. The
maturities of variable rate demand instruments held in the Funds' portfolio will
be deemed to be the longer of the demand period, or the period remaining until
the next interest rate adjustment, although stated maturities may be in excess
of one year. It is the normal practice of the Funds to hold portfolio securities
to maturity and realize par therefor unless such sale or other disposition is
mandated by redemption requirements or other extraordinary circumstances. The
Board of Directors must establish procedures designed to stabilize, to the
extent reasonably possible, the Funds' price per share as computed for the
purpose of sales and redemptions at a single value. It is the intention of the
Funds to maintain a per share net asset value of $1.00. Such procedures will
include review of the Funds' portfolio holdings by the Directors at such
intervals as they may deem appropriate, to determine whether the Funds' net
asset value calculated by using available market quotations deviates from $1.00
per share and, if so, whether such deviation may result in material dilution or
is otherwise unfair to existing shareholders. In the event the Board of
Directors determines that such a deviation exists, they will take such
corrective action as they regard as necessary and appropriate, such as selling
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity, withholding dividends, or establishing a net
asset value per share by using available market quotations.
TAXES
Each Fund intends to elect each year to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and, if it qualifies as such, it will not be subject to
federal income tax on the portion of its investment company taxable income and
net capital gain distributed to its shareholders. Each of the series of First
American is treated as a separate entity for federal income tax purposes. In
order to qualify as a regulated investment company for any taxable year, a Fund
must, in addition to certain other requirements, (1) derive at least 90% of its
gross income from dividends, interest, certain payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities or other income derived with respect to its business of investing in
such stock or securities; and (2) distribute at least 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gain over net long-term capital loss) for the taxable year.
To qualify as a regulated investment company, a Fund must also
diversify its holdings so that, at the close of each quarter of its taxable
year, (1) at least 50% of the value of its total assets consists of cash, cash
items, securities issued by the United States Government, its agencies and
instrumentalities, and the securities of other regulated investment companies,
and other securities limited generally with respect to any one issuer to not
more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (2) not more than 25% of the
value of its total assets is invested in the securities of any issuer (other
than securities issued by the United States Government,
<PAGE>
its agencies or instrumentalities, or the securities of other regulated
investment companies), or in two or more issuers that the Fund controls and that
are engaged in the same or similar trades or businesses.
Each Fund expects to distribute net realized short-term gains (if
any) once each year, although it may distribute them more frequently, if
necessary in order to maintain the Funds' net asset value at $1.00 per share.
Distributions of net investment income and net short-term capital gains are
taxable to investors as ordinary income.
Under the Code, each Fund is required to withhold 31% of reportable
payments (including dividends, capital gain distributions, if any, and
redemptions) paid to certain shareholders who have not certified that the social
security number or taxpayer identification number supplied by them is correct
and that they are not subject to backup withholding because of previous
underreporting to the IRS. These backup withholding requirements generally do
not apply to shareholders that are corporations or governmental units or certain
tax-exempt organizations.
Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as Tax Free Obligations Fund, will not be deductible by a
shareholder in proportion to the ratio of exempt-interest dividends to all
dividends other than those treated as long-term capital gains. Indebtedness may
be allocated to shares of Tax Free Obligations Fund even though not directly
traceable to the purchase of such shares. Federal tax law also restricts the
deductibility of other expenses allocable to shares of Tax Free Obligations
Fund.
For shareholders who are or may become recipients of Social Security
benefits, exempt-interest dividends are includable in computing "modified
adjusted gross income" for purposes of determining the amount of Social Security
benefits, if any, that is required to be included in gross income. The maximum
amount of Social Security benefits includable in gross income is 85%.
The Code imposes requirements on certain tax-exempt bonds which, if
not satisfied, could result in loss of tax-exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for certain
tax-exempt securities. Tax Free Obligations Fund cannot predict what additional
legislation may be enacted that may affect shareholders. The Fund will avoid
investment in such tax-exempt securities which, in the opinion of the Advisor,
pose a material risk of the loss of tax exemption. Further, if such tax-exempt
security in the Fund's portfolio loses its exempt status, the Fund will make
every effort to dispose of such investment on terms that are not detrimental to
the Fund.
CALCULATION OF PERFORMANCE DATA
The Funds may issue current yield quotations. Simple yields are
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of a recent seven calendar day period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then multiplying the base period return by
365/7. The resulting yield figure will be carried to at least the nearest
hundredth of one percent. Effective yields are computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of a recent
seven calendar day period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD -- [(BASE PERIOD RETURN + 1)365/7]-1
<PAGE>
When calculating the foregoing yield or effective yield quotations,
the calculation of net change in account value will include the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares, and all
fees, other than nonrecurring accounts or sales charges that are charged to all
shareholder accounts in proportion to the length of the base period. Realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation are excluded from the calculation of yield and effective yield.
From time to time, a Fund may advertise its "yield" and "effective
yield." These yield figures are based upon historical earnings and are not
intended to indicate future performance. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized,"
that is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. For the
seven-day period ended September 30, 1997, or in the case of Tax Free
Obligations (Qualivest Tax-Free Money Market) Fund for the seven-day period
ended November 28, 1997, the yield and effective yield, respectively, for the
Funds were as follows:
YIELD EFFECTIVE YIELD
----- ---------------
TREASURY OBLIGATIONS FUND
Class A.......................... * *
Class Y.......................... 5.19% 5.32%
Class D.......................... 5.04% 5.16%
GOVERNMENT OBLIGATIONS FUND
Class A.......................... * *
Class Y.......................... 5.20% 5.34%
Class D.......................... 5.05% 5.18%
PRIME OBLIGATIONS FUND
Class A.......................... 5.08% 5.21%
Class B.......................... 4.33% 4.42%
Class Y.......................... 5.34% 5.48%
Class D.......................... 5.18% 5.32%
TAX FREE OBLIGATIONS FUND
Class A+......................... 3.10% 3.15%
Class Y+......................... 3.40% 3.45%
Class D.......................... * *
+Yields as of November 28, 1997.
*Not in operation during the seven day period ended November 28,
1997.
<PAGE>
Tax Free Obligations Fund may also advertise its tax equivalent
yield. This yield will be computed by dividing that portion of the seven-day
yield or effective yield of the Fund (computed as set forth above) which is
tax-exempt by one minus a stated income tax rate and adding the product of that
portion, if any, of the yield of the Fund that is not tax-exempt. For the seven
day period ended November 28, 1997, the tax-equivalent yield for Tax Free
Obligations Fund was as follows:
TAX FREE OBLIGATIONS FUND
Class A.......................... 3.23% 5.35%
Class Y.......................... 3.47% 5.75%
Class D.......................... * *
+Yields as of November 28, 1997.
*Not in operation during the seven day period ended November 28,
1997.
Yield information may be useful in reviewing the Funds' performance
and for providing a basis for comparison with other investment alternatives.
However, yields fluctuate, unlike investments which pay a fixed yield for a
stated period of time. Yields for the Funds are calculated on the same basis as
other money market funds as required by applicable regulations. Investors should
give consideration to the quality and maturity of the portfolio securities of
the respective investment companies when comparing investment alternatives.
Investors should recognize that in periods of declining interest
rates the Funds' yields will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates the Funds' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Fund from the continuous sale of its shares will likely be invested
in portfolio instruments producing lower yields than the balance of the Funds'
portfolio, thereby reducing the current yield of the Fund. In periods of rising
interest rates, the opposite can be expected to occur.
Should a Fund incur or anticipate any unusual expense, loss, or
depreciation which would adversely affect its net asset values per share or
income for a particular period, the Directors would at that time consider
whether to adhere to the present dividend policy described above or revise it in
light of the then prevailing circumstances. For example, if a Fund's net asset
value per share were reduced, or were anticipated to be reduced, below $1.00,
the Directors may suspend further dividend payments until net asset value
returned to $1.00. Thus, such expenses or losses or depreciation may result in
the investor receiving upon redemption a price per share lower than that which
the investor paid.
COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER RATINGS
Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") commercial paper ratings are graded into
four categories, ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further defined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus sign
designation.
Moody's Investors Service, Inc. ("Moody's") commercial paper ratings
are opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, and it does not represent that any specific note is
a valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the
<PAGE>
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
PRIME-1 .............. Superior capacity for repayment
PRIME-2 .............. Strong capacity for repayment
PRIME-3 .............. Acceptable capacity for repayment
CORPORATE BOND RATINGS
Standard & Poor's ratings for corporate bonds include the following:
Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest-rated issues only in
small degree.
Moody's ratings for corporate bonds include the following:
Bonds rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa
securities, or fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger than the Aaa securities.
FINANCIAL STATEMENTS
The financial statements of FAF included in its annual reports to
shareholders dated September 30, 1997 and dated November 30, 1997 are
incorporated herein by reference. Such annual reports to shareholders accompany
this Statement of Additional Information.
