FIRST AMERICAN FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 1, 2000
AS SUPPLEMENTED DECEMBER 13, 2000
GOVERNMENT OBLIGATIONS FUND
PRIME OBLIGATIONS FUND
TAX FREE OBLIGATIONS FUND
TREASURY OBLIGATIONS FUND
This Statement of Additional Information relates to the Class A, Class
Y and Class D Shares of Government Obligations Fund, Prime Obligations Fund, Tax
Free Obligations Fund and Treasury Obligations Fund and the Class B and Class C
Shares of Prime Obligations Fund (collectively, the "Funds"), each of which is a
series of First American Funds, Inc ("FAF"). This Statement of Additional
Information is not a prospectus, but should be read in conjunction with the
Funds' current Prospectuses dated December 1, 2000. The financial statements
included as part of the Funds' Annual Report to shareholders for the fiscal year
ended September 30, 2000 are incorporated by reference into this Statement of
Additional Information. This Statement of Additional Information is incorporated
into the Funds' Prospectuses by reference. To obtain copies of Prospectuses or
the Funds' Annual Report at no charge, write the Funds' distributor, SEI
Investments Distribution Co., Oaks, Pennsylvania 19456, or call Investor
Services at 1-800-637-2548. Please retain this Statement of Additional
Information for future reference.
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TABLE OF CONTENTS
PAGE
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GENERAL INFORMATION......................................................... 1
INVESTMENT RESTRICTIONS..................................................... 2
Government Obligations Fund........................................ 2
Prime Obligations Fund............................................. 2
Tax Free Obligations Fund.......................................... 3
Treasury Obligations Fund.......................................... 5
ADDITIONAL RESTRICTIONS..................................................... 6
INVESTMENT OBJECTIVES AND POLICIES.......................................... 6
Municipal Securities............................................... 7
Loan Participations; Section 4(2) and Rule 144A Securities......... 7
Securities of Foreign Banks and Branches........................... 8
Foreign Securities................................................. 8
United States Government Securities................................ 8
Repurchase Agreements.............................................. 9
Credit Enhancement Agreements...................................... 9
Put Options........................................................ 9
Variable and Floating Rate Obligations.............................10
Lending of Portfolio Securities....................................10
When-Issued and Delayed Delivery Securities........................10
Money Market Funds.................................................11
CFTC Information...................................................11
PORTFOLIO TURNOVER..........................................................11
DIRECTORS AND EXECUTIVE OFFICERS............................................11
Directors..........................................................11
Executive Officers.................................................12
Compensation.......................................................13
CODE OF ETHICS..............................................................14
INVESTMENT ADVISORY AND OTHER SERVICES......................................14
Investment Advisor.................................................15
Distributor and Distribution Plans.................................16
Administrator; Custodian; Counsel; and Auditors....................18
PORTFOLIO TRANSACTIONS......................................................19
CAPITAL STOCK...............................................................20
NET ASSET VALUE AND PUBLIC OFFERING PRICE...................................23
VALUATION OF PORTFOLIO SECURITIES...........................................24
TAXES.......................................................................24
CALCULATION OF PERFORMANCE DATA.............................................25
ADDITIONAL INFORMATION ABOUT SELLING SHARES.................................26
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By Telephone.......................................................26
By Mail............................................................27
By Checking Account................................................28
Redemption Before Purchase Instruments Clear.......................28
CO28ERCIAL PAPER AND BOND RATINGS...........................................28
Commercial Paper Ratings...........................................28
Corporate Bond Ratings.............................................28
FINANCIAL STATEMENTS........................................................29
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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. 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 five classes, Class A, Class B,
Class C, Class Y and Class D. Government Obligations Fund, Tax Free Obligations
Fund and Treasury 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.
Each of the Funds are open-end diversified companies.
FAF has prepared and will provide a separate Prospectus relating to the
Class A, Class B and Class C (the "Class A, Class B and Class C Shares
Prospectus"), the Class Y (the "Class Y Shares Prospectus") and the Class D
Shares (the "Class D Shares Prospectus"), of the Funds respectively. These
Prospectuses can be obtained by writing SEI Investments Distribution Co. at
Oaks, PA 19456, or by calling First American Funds Investor Services at
1-800-637-2548.
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 President or Treasurer 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.
This Statement of Additional Information may also refer to affiliated
investment companies, including: First American Investment Funds, Inc. ("FAIF");
First American Strategy Funds, Inc. ("FASF"); First American Insurance
Portfolios, Inc. ("FAIP"); and twelve separate closed-end funds (American
Strategic Income Portfolio Inc., American Strategic Income Portfolio Inc.-II,
American Strategic Income Portfolio Inc.-III, American Municipal Income
Portfolio Inc., Minnesota Municipal Income Portfolio Inc., American Select
Portfolio Inc., American Municipal Term Trust Inc., American Municipal Term
Trust Inc.-II, American Municipal Term Trust Inc.-III, Minnesota Municipal Term
Trust Inc., Minnesota Municipal Term Trust Inc.-II, and Mentor Income Fund,
Inc.), collectively referred to as the First American Closed-End Funds
("FACEF").
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INVESTMENT RESTRICTIONS
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 (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). 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" below).
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 purchase of obligations referred to under "Investment
Objectives and Policies" below).
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
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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" below).
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 advisor
owns beneficially more than 1/2 of 1% of the securities of
such issuer and together own more than 5% of the securities of
such issuer.
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:
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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" below).
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.
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 under
"Investment Objectives and Policies" below.
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" below).
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.
11. Invest 25% or more of its total assets in the securities of
any industry; provided that there shall be nolimitation 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 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.
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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. Treasury Obligations Fund may not:
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. (As a non-fundamental policy, the
Fund will not make additional investments while its borrowings
exceed 5% of total assets.) 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" below).
As a non-fundamental policy, Treasury Obligations Fund will not invest
more than 10% of its net assets in illiquid assets, including, without
limitation, repurchase agreements maturing in more than seven days.
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As to investment restriction (6) above, utility companies are
considered four separate industries: gas, electric, water and telephone
companies; and as to finance companies, the following two categories are each
considered a separate industry:
* business credit institutions, such as Honeywell Finance Corporation
and General Electric Credit Corp., and
* personal credit institutions, such as Sears Roebuck Acceptance Corp.
and Household Finance Corporation.
ADDITIONAL RESTRICTIONS
The Funds may not invest in obligations of any affiliate of U.S.
Bancorp, including U.S. Bank National Association ("U.S. Bank" or the
"Advisor").
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.
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 Board of Directors of FAF 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.
INVESTMENT OBJECTIVES AND POLICIES
The main investment strategies of the Funds are set forth in the Funds'
current Prospectuses under "Fund Summaries." This Section describes in detail
the Funds' main investment strategies and other secondary investment strategies.
If a percentage limitation under this section or under "Investment
Restrictions" above 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.
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MUNICIPAL SECURITIES
Tax Free Obligations Fund invests principally in municipal securities
such as municipal bonds and other debt obligations. These municipal bonds and
debt securities are issued by the states and by their local and special-purpose
political subdivisions. The term "municipal bond" as used in this Section
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 upon a default by the issuer of its principal
and interest payment obligation. 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 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.
Tax Free Obligations Fund may also invest up to 20% of its total assets
in municipal 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 alternative minimum tax.
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
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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
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. Various provisions of federal law governing the
establishment and operation of domestic branches do not apply to foreign
branches of domestic banks. Obligations of United States branches of foreign
banks may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by federal
and state regulation as well as by governmental action in the country in which
the foreign bank has its head office.
Because the 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, 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.
FOREIGN SECURITIES
Prime Obligations Fund may invest up to 25% of its total assets
collectively in U.S. dollar-denominated obligations of foreign companies.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a
foreign company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries.
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
8
<PAGE>
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 before entering into 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.
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VARIABLE AND FLOATING RATE OBLIGATIONS
Certain of the obligations in which Government Obligations Fund, Prime
Obligations Fund and 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 ("SEC") 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.
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 Funds purchase large denomination CDs, they do 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.
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, bank 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, 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. 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 Funds will pay a
portion of the income earned on the lending transaction to the placing broker
and may pay administrative and custodial fees (including fees to an affiliate of
the Advisor) in connection with these loans which, in the case of U.S. Bank, are
40% of the Funds' income from such securities lending transactions. U.S. Bank
may act as securities lending agent for the Funds subject to U.S. Bank's
compliance with conditions contained in an SEC exemptive order permitting U.S.
Bank to provide such services and receive compensation.
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, it 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. The Funds do not receive
income from these securities until such securities are delivered. Each Fund will
also establish a segregated account with its custodian in which it 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.
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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 SEC.
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 "Investment Objectives and Policies" and, as set
forth "Fund Summaries" sections of the Funds' Prospectuses, each 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.
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. Under Minnesota law, FAF's Board of Directors is generally
responsible for the overall operation and management of FAF. 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, of FAIF since September 1994, of FASF since
June 1996 and of FAIP since August 1999; Chairman (1989-1993) and Chief
Executive Officer (1993-present), Okabena Company (private family investment
office). Age: 58.
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Roger A. Gibson, 1020 15th Street, Ste. 41A, Denver, Colorado 80202:
Director of FAF, FAIF and FASF since October 1997, and of FAIP since August
1999; 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: 54.
Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997, and of FAIP since August
1999; Chairman of Hunter, Keith Industries, a diversified manufacturing and
services management company, since 1975. Age: 53.
Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FAF and FAIF since November 1993, of FASF since June 1996, and of
FAIP since August 1999; Owner of Executive Management Consulting, Inc., a
management consulting firm; Chief Executive Officer of Creative Promotions
International LLC, promotional award programs and products; 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 59
* John M. Murphy, Jr., 601 Second Avenue South, Minneapolis, Minnesota
55402; Director of FAIF, FAF and FASF since June 1999, and of FAIP since August
1999; Chairman and Chief Investment Officer of First American Asset Management
and U.S. Bank Trust, N.A., and Executive Vice President of U.S. Bancorp, from
1991 to 1999; Executive Vice President of U.S. Bancorp since January 1999;
Chairman Minnesota - U.S. Bancorp since 2000. Age 59.
* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center, Minnesota
55429: Director of FAIF, FAF and FASF since January 31, 1997, and of FAIP since
August 1999; employed by U.S. Bancorp (fka First Bank System, Inc.) and
subsidiaries from 1957 to January 31, 1997, most recently as Vice President,
U.S. Bank National Association (fka First Bank National Association). Age: 66.
Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FAF since 1984 and of FAIF since April 1991, of
FASF since June 1996, and of FAIP since August 1999; 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: 60.
Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FAIF since August 1987, of FAF since April 1991, of FASF since June
1996, and of FAIP since August 1999; Chair of FAIF's, FAF's and FASF's Boards
since September 1997, and of FAIP's Board since 1999; 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: 56.
EXECUTIVE OFFICERS
Thomas Plumb, First American Asset Management, 22 South 9th Street,
16th floor , Minneapolis, Minnesota 55402; President of FAIF, FAF, FASF, and
FAIP since March 11, 2000; Chief Executive Officer of First American Asset
Management since 1999; Executive Vice President of First American Asset
Management from 1997-1999; Senior Vice President of First American Asset
Management from 1992-1997. Age: 41.
Paul A. Dow, First American Asset Management, 601 Second Avenue South,
Minneapolis, Minnesota 55402, Vice President Investments of FAIF, FAF, FASF and
FAIP since March 11, 2000; Chief Investment Officer and President of First
American Asset Management since 1999; Senior Vice President of First American
Asset Management from 1998-1999; Chief Executive Officer of Piper Jaffray from
1997-1998; Chief Investment Officer of Piper Jaffray from 1989-1997. Age : 49.
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Peter O. Torvik, First American Asset Management, 601 Second Avenue
South, Minneapolis, Minnesota 55402, Vice President Marketing of FAIF, FAF, FASF
and FAIP since September 20, 2000; Executive Vice President of First American
Asset Management; President and partner of DPG Group, a Florida-based
partnership engaged in affinity marketing from 1995-2000. Age: 46.
Jeffery M. Wilson, First American Asset Management, 601 Second Avenue
South, Minneapolis, Minnesota 55402; Vice President Administration of FAIF, FAF,
FASF and FAIP since March 11, 2000; Senior Vice President of First American
Asset Management. Age: 44.
Robert H. Nelson, First American Asset Management, 601 Second Avenue
South, Minneapolis, Minnesota 55402; Treasurer of FAIF, FAF, FASF and FAIP since
March 11, 2000; Senior Vice President of First American Asset Management since
1998; Senior Vice President of Piper Capital Management Inc. from 1994-1998.
Age: 37.
Christopher J. Smith, First American Asset Management, 601 Second
Avenue South, Minneapolis, Minnesota 55402; Secretary of FAIF, FAF, FASF and
FAIP since March 11, 2000; Executive Vice President of First American Asset
Management since 1998; General Counsel of Investment Advisors Inc. from
1991-1998. Age: 38.
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, and of FAIP since September 1999; Partner, Dorsey & Whitney
LLP, a Minneapolis-based law firm and general counsel of FAIF, FAF and FASF.
Age: 55.
James D. Alt, 220 South Sixth Street, Minneapolis, Minnesota 55402;
Assistant Secretary of FAF, FAIF and FASF since September 1998, and of FAIP
since September 1999; Partner, Dorsey & Whitney LLP, a Minneapolis-based law
firm. Age: 49.
Kathleen L. Prudhomme, 220 South Sixth Street, Minneapolis, Minnesota
55402; Assistant Secretary of FAF, FAIF and FASF since September 1998, and of
FAIP since September 1999; Partner, Dorsey & Whitney LLP, a Minneapolis-based
law firm. Age: 47.
Alaina Metz, Bysis Fund Services, 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219; Assistant Secretary for FAIF, FAF, FASF and FAIP since
March 11, 2000; Chief Administrative Officer of Bysis Fund Services. Age: 33.
COMPENSATION
The First American Family of Funds, which includes FAIF, FAF, FASF,
FAIP and FACEF, currently pays only to directors of the funds who are not paid
employees or affiliates of the funds, a fee of $27,000 per year ($40,500 in the
case of the Chair) plus $4,000 ($6,000 in the case of the Chair) per meeting of
the Board attended and $1,200 per committee meeting attended ($1,800 in the case
of a committee chair) and reimburses travel expenses of directors and officers
to attend Board meetings. In the event of telephonic Board or committee
meetings, each director receives a fee of $500 per Board or committee meeting
($750 in the case of the Chair or committee chair). In addition, directors may
receive a per diem fee of $1,500 per day, plus travel expenses when directors
travel out of town on Fund business. However, directors do not receive the
$1,500 per diem amount plus the foregoing Board or committee fee for an
out-of-town committee or Board meeting but instead receive the greater of the
total per diem fee or meeting fee. Legal fees and expenses are also paid to
Dorsey & Whitney LLP, the law firm of which Michael J. Radmer, secretary of
FAIF, FAF, FASF, FAIP and FACEF, James D. Alt, assistant secretary of FAIF, FAF,
FASF, FAIP and FACEF, and Kathleen L. Prudhomme, assistant secretary of FAIF,
FAF, FASF, FAIP and FACEF, are partners. The following table sets forth
information concerning aggregate compensation paid to each director of FAF (i)
by FAF (column 2), and (ii) by FAIF, FAF, FASF, FAIP and FACEF collectively
(column 5) during the fiscal year ended September 30, 2000. No executive officer
or affiliated person of FAF received any compensation from FAF in excess of
$60,000 during such fiscal year:
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<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NAME OF PERSON, POSITION AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION RETIREMENT BENEFITS UPON FROM REGISTRANT AND
FROM REGISTRANT * BENEFITS ACCRUED RETIREMENT FUND COMPLEX PAID
AS PART OF FUND TO DIRECTORS **
EXPENSES
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $ 34,001 -0- -0- $ 57,200
Roger A. Gibson, Director 25,033 -0- -0- 54,800
Andrew M. Hunter III, Director 17,764 -0- -0- 56,000
Leonard W. Kedrowski, Director 26,732 -0- -0- 58,400
Robert L. Spies, Director 18,802 -0- -0- 59,600
John M. Murphy, Jr., Director 0 -0- -0- 0
Joseph D. Strauss, Director 35,272 -0- -0- 65,600
Virginia L. Stringer, Director 44,285 -0- -0- 74,500
</TABLE>
---------------------------------------
* Included in the Aggregate Compensation From Registrant under column 2
are amounts deferred by Directors pursuant to the Deferred Compensation plan
discussed below. Pursuant to this plan, compensation was deferred for the
following directors: Roger A. Gibson, $4,659; Andrew M. Hunter III, $9,591;
Leonard W. Kedrowski, $4,932; Robert L. Spies, $10,272; and Joseph D. Strauss,
$2,300.
** Deferred compensation is included in the Total Compensation under
column 5 for the following directors: Roger A. Gibson, $20,525; Andrew M. Hunter
III, $42,250; Leonard W. Kedrowski, $21,725; Robert L. Spies, $45,250; and
Joseph D. Strauss, $10,130.
The directors may elect to defer payment of up to 100% of the fees they
receive in accordance with a Deferred Compensation Plan (the "Plan"). Under the
Plan, a director may elect to have his or her deferred fees treated as if they
had been invested in the shares of one or more funds and the amount paid to the
director under the Plan will be determined based on the performance of such
investments. Distributions may be taken in a lump sum or over a period years.
The Plan will remain unfunded for federal income tax purposes under the Internal
Revenue Code of 1986, as amended. Deferral of director fees in accordance with
the Plan will have a negligible impact on fund assets and liabilities and will
not obligate the funds to retain any director or pay any particular level of
compensation.
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 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.
CODE OF ETHICS
First American Funds, Inc., First American Asset Management, a division
of U.S. Bank National Association, and SEI Investments Distribution Co. have
each adopted a Code of Ethics pursuant to Rule 17j-1 of the 1940 Act. Each of
these Codes of Ethics permits personnel to invest in securities for their own
accounts. These Codes of Ethics are on public file with, and are available from,
the Securities and Exchange Commission.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, serves as the investment advisor and manager of the Funds
through its First American Asset Management group. The Advisor is a
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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 four banks and eleven trust companies with banking
offices in 16 contiguous states. USB also has various other subsidiaries engaged
in financial services. At September 30, 2000 on a pro forma combined basis, USB
and its consolidated subsidiaries had consolidated assets of more than $86
billion, consolidated deposits of more than $51 billion and shareholders' equity
of more than $8 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 advisor 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
advisor 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 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 Advisor may, at its option, waive any or all of its fees, or
reimburse expenses, with respect to each of the Funds from time to time. Any
such waiver or reimbursement is voluntary and may be discontinued at any time
unless otherwise set forth in the Prospectus. The Advisor also may absorb or
reimburse expenses of the Funds from time to time, in its discretion, while
retaining the ability to be reimbursed by the Funds for such amounts prior to
the 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 following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal years ended September 30,
1998, September 30, 1999 and September 30, 2000:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 1998 September 30, 1999 September 30, 2000
Advisory Fee Advisory Fee Advisory Fee Advisory Fee Advisory Fee Advisory Fee
Before Waivers After Waivers Before Waivers After Waivers Before Waivers After Waivers
<S> <C> <C> <C> <C> <C> <C>
Government Obligations Fund $ 6,013,155 $ 5,031,567 $ 7,246,387 $ 6,060,287 $ 7,197,627 $ 6,131,785
Prime Obligations Fund 25,709,852 20,468,245 42,361,239 36,048,136 47,309,640 42,594,558
Tax Free Obligations Fund 1,002,936(1) 674,436(1) 2,709,709 2,199,008 2,766,005 2,325,107
Treasury Obligations Fund 19,284,901 16,240,243 24,069,258 20,324,364 23,308,337 20,026,508
</TABLE>
(1) Information is for the ten month period from December 1, 1997 to
September 30, 1998.
15
<PAGE>
DISTRIBUTOR AND DISTRIBUTION PLANS
SEI Investments Distribution Co. (the "Distributor" ) serves as the
distributor for the Class A, Class B, Class C, Class Y and Class D Shares of the
Funds. The Distributor is a wholly-owned subsidiary of SEI Investments Company.
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, 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, and as the
distributor for the Class C Shares pursuant to a Distribution and Service
Agreement dated December 9, 1998 (the "Class C 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.
Fund 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.
U.S. Bancorp Investment Services, Inc. ("USBI") and U.S. Bancorp Piper
Jaffray Inc. ("Piper"), broker-dealers affiliated with the Advisor, are
Participating Institutions. The Advisor pays USBI and Piper up to 0.25% of the
portion of each Fund's average daily net assets attributable to Class Y Shares
for which USBI or Piper are responsible, respectively, in connection with USBI's
or Piper's provision of shareholder support services. Such amounts paid to USBI
and Piper, by the Advisor, will not affect any agreement by the Advisor to limit
expenses of each Fund.
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. The fee may be used by the Distributor to provide compensation for
shareholder servicing activities with respect to the Class A Shares. 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. This fee is calculated and paid each month based on average daily net
assets of Class A Shares of each Fund for that month.
The Class B shares pay to the Distributor a shareholder servicing fee
at the annual rate of 0.25% of the average daily net assets of the Class B
shares. The fee may be used by the Distributor to provide compensation for
shareholder activities with respect to the Class B shares beginning one year
after purchase. The Class B shares also pay to the Distributor a distribution
fee at the annual rate of 0.75% of the average daily net assets of the Class B
shares. The distribution fee is intended to compensate the distributor for
advancing a commission to institutions purchasing Class B shares.
The Class C shares pay to the Distributor a shareholder servicing fee
at the annual rate of 0.25% of the average daily net assets of the Class C
shares. The fee may be used by the Distributor to provide compensation for
shareholder activities with respect to the Class C shares. This fee is
calculated and paid each month based on average daily net assets of the Class C
shares. The Class C shares also pay to the Distributor a distribution fee at the
annual rate of 0.75% of the average daily net assets of the Class C shares. The
Distributor may use the distribution fee to provide compensation to institutions
through which shareholders hold their shares beginning one year after purchase.
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. The 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 Shares of each Fund
for that month.
The Distributor receives no compensation for distribution of the Class
Y Shares.
16
<PAGE>
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.
SEI Investments Distribution Co., the Fund's underwriter, received the
following compensation from each Fund during its most recent fiscal year.
<TABLE>
<CAPTION>
Net Underwriting Compensation on Brokerage Other
and Commissions Redemptions and Commissions Compensation
Repurchases
<S> <C> <C> <C> <C>
Government Obligations Fund None None None None
Prime Obligations Fund None None None None
Tax Free Obligations Fund None None None None
Treasury Obligations Fund None None None None
</TABLE>
FAF has adopted Plans of Distribution (the "Plans") with respect to
Class A, Class B, Class C 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 and Class C Plan also authorize the
Distributor to retain the contingent deferred sales charge applied on
redemptions of Class B Shares and Class C Shares, respectively. 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, 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, 1998, September 30, 1999 and September 30, 2000.
<TABLE>
<CAPTION>
Year Ended September 30, 1998
Class A Class B Class C Class Y Class D
<S> <C> <C> <C> <C> <C>
Government Obligations Fund $ 166,887(1) $ * $ * $ 0 $ 621,492
Prime Obligations Fund 3,214,942 20,640 $ 904 0 392,629
Tax Free Obligations Fund 203,999(2) * * 0 21,952(2)
Treasury Obligations Fund 176,091(3) * * 0 5,046,268
<CAPTION>
Year Ended September 30, 1999
Class A Class B Class C Class Y Class D
<S> <C> <C> <C> <C> <C>
Government Obligations Fund $ 1,096,656 $ * $ * $ 0 $ 571,999
Prime Obligations Fund 10,280,070 $37,546 $ 904 0 538,850
Tax Free Obligations Fund 718,454 * * 0 45,542
Treasury Obligations Fund 99,338 * * 0 5,947,592
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30, 2000
Class A Class B Class C Class Y Class D
<S> <C> <C> <C> <C> <C>
Government Obligations Fund $ 1,113,870 $ * $ * $ 0 $ 646,633
Prime Obligations Fund 11,347,336 40,878 2,845 0 741,724
Tax Free Obligations Fund 746,687 * * 0 44,856
Treasury Obligations Fund 76,139 * * 0 5,311,719
</TABLE>
* The Fund did not offer this class of shares during the period indicated.
(1) For the period from April 29, 1998 to September 30, 1998.
(2) For the ten month period from December 1, 1997 to September 30, 1998.
(3) For the period from November 3, 1997 to September 30, 1998.
ADMINISTRATOR; CUSTODIAN; COUNSEL; AUDITORS
ADMINISTRATOR. Effective January 1, 2000 U.S. Bank National Association
(the "Administrator"), 601 Second Avenue South, Minneapolis, Minnesota 55402,
serves as the Administrator for the Funds pursuant to an Administration
Agreement between it and the Funds. The Administrator is a subsidiary of USB.
Under the Administration Agreement, the Administrator provides, or compensates
others to provide, services to the Funds. These services include various
oversight and legal services, accounting services, transfer agency and dividend
disbursing services and shareholder services. The Funds pay U.S. Bank fees which
are calculated daily and paid monthly, equal to each fund's pro rata share of an
amount equal, on an annual basis, to 0.070% of the aggregate average daily
assets of all open-end mutual funds in the First American fund family up to $8
billion, and 0.055% of the aggregate average daily net assets of all open-end
mutual funds in the First American fund family in excess of $8 billion. (For the
purposes of this Agreement, the First American fund family includes all series
of FAF, FASF, FAIF and FAIP.) In addition, the Funds pay U.S. Bank annual fees
of $18,500 per CUSIP, shareholder account maintenance fees of $9 to $15 per
account, closed account fees of $3.50 per account, and Individual Retirement
Account fees of $15 per account.
Prior to January 1, 2000, SEI Investments Management Corporation served
as the administrator for the Funds. SEI Investments Management Corporation is a
wholly-owned subsidiary of SEI Investments Company, which also owns the Funds'
Distributor. See "- Distributor and Distribution Plans" below. The Funds paid to
SEI Investment Management a fee equal to (i) 0.070% of each Fund's average daily
net assets until aggregate net assets of all Funds exceeded $8 billion and (ii)
0.055% to the extent aggregate net assets of all Funds exceeded $8 billion.
The following table sets forth total administrative fees, after
waivers, paid by each of the Funds for the fiscal years ended September 30,
1998, September 30, 1999 and September 30, 2000:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1999 2000
<S> <C> <C> <C>
Government Obligations Fund $ 915,374 $1,067,565 $1,056,986
Prime Obligations Fund 3,868,312 6,234,662 6,937,700
Tax Free Obligations Fund 149,868(1) 399,068 405,449
Treasury Obligations Fund 2,904,106 3,543,123 3,424,307
</TABLE>
(1) For the ten month period from December 1, 1997 to September 30, 1998.
CUSTODIAN. 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 the
Funds' order. The Custodian is granted a lien for unpaid compensation upon any
cash or securities held by it for the Funds.
COUNSEL. Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis,
Minnesota 55402, is independent general counsel for the Funds.
18
<PAGE>
AUDITORS. Ernst & Young LLP, 1400 Pillsbury Center, Minneapolis,
Minnesota 55402, serves as the Funds' independent auditors, providing audit
services, including audits of the annual financial statements and assistance and
consultation in connection with SEC filings for the years ended September 30,
1999 and September 30, 2000.
KPMG LLP, 90 South Seventh Street, Minneapolis, Minnesota 55402, acted
as the Funds' independent auditors, providing audit services including audits of
the annual financial statements and assistance and consultation in connection
with SEC filings for the fiscal periods ended as of September 30, 1998.
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 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. 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
transaction quality and commissions, if any, are comparable to that available
from other qualified brokers.
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.
19
<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, 2000, Government Obligations
Fund, Prime Obligations Fund and Treasury Obligations Fund paid no brokerage
commissions to affiliated brokers.
At September 30, 2000, 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:
Goldman Sachs (commercial paper) $122,654,000
Goldman Sachs (notes) 88,000,000
Morgan Stanley Dean Witter (commercial paper) 200,000,000
Morgan Stanley Dean Witter (notes) 150,000,000
CAPITAL STOCK
Each share of the Funds' $.01 par value common stock is fully paid,
nonassessable, and transferable. Shares may be issued as either full or
fractional shares. Fractional shares have pro rata the same rights and
privileges as full shares. Shares of the Funds have no preemptive or conversion
rights.
Each share of 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.
As of November 13, 2000, the directors of FSF owned shares of FASF, FAF
and FAIF with an aggregate net asset value of approximately $9 million. As of
November 13, 2000, the directors and officers of FAF as a group owned less
than one percent of each Fund's outstanding shares. As of November 1, 2000, 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 C Class D Class Y
-----------------------------------------------------------------------------------------------------------
Treasury Obligations Fund
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Treasury Oblig A Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 30.50%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 65.31%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Treasury Obligations Fund (continued) Class A Class B Class C Class D Class Y
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Bank NA US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 99.86%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 24.90%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 74.50%
-----------------------------------------------------------------------------------------------------------
Government Obligations Fund Class A Class B Class C Class D Class Y
-----------------------------------------------------------------------------------------------------------
Government Oblig FD A Omnibus Account
USBancorp Piper Jaffray for the Exclusive
Benefit of Its Customers
Attn: TA Services MPFP 1922
601 2nd Ave S
Minneapolis, MN 55402-4303 92.57%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 6.96%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 99.97%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 46.31%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Prime Obligations Fund Class A Class B Class C Class D Class Y
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime Oblig A Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 80.31%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 19.16%
Prime Oblig B Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 28.04%
U S Bancorp Investments INC
FBO 531855831
100 South Fifth Street Suite 1400
Minneapolis, MN 55402-1217 7.32%
Prime Oblig C Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 93.91%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 88.88%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 11.12%
Prime Oblig Y Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 8.24%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Prime Obligations Fund (continued) Class A Class B Class C Class D Class Y
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 53.47%
Special Custody Account For the Exclusive Benefit
Of Customers of FBS Investment Services INC
100 South Fifth St Suite 1400
Attn: Money Fund Unit R/R
Minneapolis, MN 55402-1217 35.56%
-----------------------------------------------------------------------------------------------------------
Tax Free Fund Class A Class B Class C Class D Class Y
-----------------------------------------------------------------------------------------------------------
Tax Free Oblig A Omnibus Account USBancorp
Piper Jaffray for the Exclusive Benefit of It's
Customers
Attn TA Services MPFP1922
601 2nd Ave S
Minneapolis, MN 55402-4303 96.30%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 99.95%
US Bank NA
US Bank Trust Center
Attn: Linda Fritz SPER0603
180 5th St E
Saint Paul, MN 55101-1606 99.43%
</TABLE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The public offering price of the shares of a Fund generally equals the
Fund's net asset value plus any applicable sales change. A summary of any
applicable sales charge assessed on Fund share purchases is set forth in the
Fund's 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, 2000, the net
asset value per share for the Funds was calculated as set forth below.
Net Assets + Shares Net Asset
(In Dollars) Outstanding Value Per Share
(In Dollars)
GOVERNMENT OBLIGATIONS FUND
Class A $ 470,587,406 470,569,753 $ 1.00
Class Y 937,229,612 937,455,427 1.00
Class D 472,078,270 472,146,334 1.00
PRIME OBLIGATIONS FUND
Class A $4,614,094,167 4,614,105,161 $ 1.00
Class B 4,009,059 4,010,765 1.00
Class C 370,621 370,607 1.00
Class Y 6,431,028,574 6,431,087,504 1.00
Class D 515,806,152 515,824,670 1.00
23
<PAGE>
TAX FREE OBLIGATIONS FUND
Class A $ 286,449,037 286,460,761 $ 1.00
Class Y 375,890,879 375,894,184 1.00
Class D 24,112,020 24,111,585 1.00
TREASURY OBLIGATIONS FUND
Class A $ 30,506,492 30,481,745 $ 1.00
Class Y 2,065,657,710 2,065,691,461 1.00
Class D 3,252,550,713 3,252,580,451 1.00
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 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"). If so qualified, each Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders.
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.
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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 under
reporting 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
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.
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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, 2000, the yield and effective yield, respectively, for the Funds
were as set forth below.
Yield Effective Yield
GOVERNMENT OBLIGATIONS FUND
Class A 5.92 % 6.09 %
Class Y 6.22 6.41
Class D 6.07 6.25
PRIME OBLIGATIONS FUND
Class A 5.90 6.07
Class B 5.26 5.40
Class C 5.26 5.40
Class Y 6.26 6.45
Class D 6.11 6.29
TAX FREE OBLIGATIONS FUND
Class A 4.03 4.11
Class Y 4.33 4.42
Class D 4.18 4.26
TREASURY OBLIGATIONS FUND
Class A 5.76 5.93
Class Y 6.01 6.19
Class D 5.86 6.03
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 the maximum federal 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 September 30, 2000, the tax-equivalent yield for Tax Free
Obligations Fund was as follows:
Tax-Equivalent Tax-Equivalent
Yield Effective Yield
TAX FREE OBLIGATIONS FUND
Class A 6.67 % 6.80 %
Class Y 7.17 7.32
Class D 6.92 7.05
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.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY TELEPHONE
A shareholder may redeem shares of a Fund, if he or she elects the
privilege on the initial shareholder application, by calling his or her
financial institution to request the redemption. Shares will be redeemed at the
net asset value next determined after the Fund receives the redemption request
from the financial institution (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 3:00 p.m. Central Time (for Government Obligations Fund, Prime
Obligations Fund and Treasury 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.
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It is the financial institution's responsibility to transmit redemption requests
promptly. Redemptions processed by 3:00 p.m. Central Time (for Government
Obligations Fund, Prime Obligations Fund and Treasury 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 generally 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.
BY MAIL
Shareholders may redeem Fund shares by sending a written request to
their investment professional, their financial institution, or the Funds. 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 $50,000 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 for
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
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signature guarantee program. The Funds and the Transfer Agent reserve the right
to amend these standards at any time without notice.
BY CHECKING ACCOUNT - PRIME OBLIGATIONS FUND, CLASS A SHARES ONLY
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.
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 cleared, which could take up to ten calendar days from the purchase
date.
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 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:
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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 report to
shareholders dated September 30, 2000 is incorporated herein by reference.
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