<PAGE>
Rule 497(e)
File Nos. 333-16093
and 811-0792
BERKELEY FUNDS
BERKELEY MONEY MARKET FUND
SUPPLEMENT DATED FEBRUARY 28, 1999
TO
PROSPECTUS DATED FEBRUARY 28, 1999
On December 31, 1998, City National Bank acquired, by merger, North American
Trust Company, an affiliate of Berkeley Capital Management, the current
investment manager of the Berkeley Money Market Fund (the "Fund"). In connection
with this acquisition, Berkeley Capital Management intends to cease management
of the Fund as soon as a new investment manager is approved by the Fund's
shareholders. On January 14, 1999, the Board of Trustees of Berkeley Funds
approved a new investment management agreement (the "New Agreement") between the
Fund and City National Bank, subject to approval by Fund shareholders. The
investment management fee and the total ordinary operating expenses of the Fund
(after waivers and reimbursements) under the New Agreement will remain the same
as provided for in the existing investment management agreement with Berkeley
Capital Management. During that same meeting, the Board of Trustees also
approved: (i) a new distribution agreement with SEI Distribution Co., (ii) a new
custodian agreement with First Union National Bank, (iii) a new administration
agreement and a new transfer agent agreement with SEI Investments Mutual Funds
Services, (iv) the appointment of KPMG LLP as new independent auditors of the
Trust and (v) certain Board of Trustees restructuring matters.
The Board of Trustees has called a special meeting of shareholders of the Fund
(the "Shareholders' Meeting") to be held on March 31, 1999. In the Shareholders'
Meeting, shareholders will be asked to approve the following proposals: (1) the
approval of the New Agreement with City National Bank, (2) the nomination of
certain individuals to serve as new trustees of Berkeley Funds, and (3) the
appointment of KPMG LLP to serve as new independent auditors to the Fund. Proxy
materials describing these proposals and to solicit shareholders' votes have
been mailed to shareholders who owned shares of the Fund on February 11, 1999,
which was the "record date" for determining shareholders who are entitled to
vote at the Shareholders' Meeting. If shareholders approve the New Agreement,
City National Bank will become the Fund's investment manager as soon as
practicable after the Shareholders' Meeting.
<PAGE>
[LOGO]
BERKELEY MONEY MARKET FUND
PROSPECTUS DATED FEBRUARY 28, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview...................................................... 4
Our goal............................................... 4
How we plan to achieve our goal........................ 4
Types of securities.................................... 4
Risks of investing in our Fund......................... 5
Past performance....................................... 5
Understanding expenses........................................ 6
Fee table.............................................. 6
Fee example............................................ 6
Management of the Fund........................................ 7
Account policies.............................................. 8
Understanding earnings and taxes.............................. 9
How to buy and sell shares.................................... 10
Opening an account..................................... 11
Buying shares.......................................... 11
Selling shares......................................... 12
Financial highlights.......................................... 14
Important terms to know....................................... 15
For more information ........................................ back cover
</TABLE>
More detailed information on all subjects covered in this simplified prospectus
is contained within the Statement of Additional Information ("SAI"). Investors
seeking more in-depth explanations of this Fund should request the SAI and
review it before purchasing shares.
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<PAGE>
OVERVIEW
OUR GOAL
The Fund is a money market fund that seeks to provide current income
through low-risk investments and to maintain a $1.00 per share net asset
value. The goal of the Fund can only be changed with shareholder
approval.
HOW WE PLAN TO ACHIEVE OUR GOAL
OUR STRATEGY. We purchase liquid, high quality, short-term debt
securities in U.S. dollar denominated money market instruments. The
securities must have maturities of no more than 397 days and, in our
opinion, present minimal credit risk.
TYPES OF SECURITIES
The Fund's principal investments are as follows:
- Certificates of deposit, time deposits;
- Commercial paper;
- Short-term corporate obligations;
- Shares of investment companies that invest exclusively
in the same types of securities as we do (up to 10% of
the Fund's total assets, with no more than 5% in any
individual investment company).
Please review the SAI for more detailed descriptions of these securities.
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<PAGE>
RISKS OF INVESTING IN OUR FUND
As with any money market fund, there are risks of investing. We cannot
guarantee that we will meet our investment goals. Here are some other
risks to consider:
MAINTAINING THE NET ASSET VALUE. We cannot guarantee that the Fund will
be able to maintain a stable net asset value of $1.00 per share. You may
lose money by investing in the Fund.
NO FEDERAL GUARANTEES. As with any money market mutual fund, an
investment in the Fund is not a deposit of a bank and is not insured,
guaranteed, or protected by the FDIC, Federal Reserve Board, or any
agency of the U.S. Government.
THE EFFECT OF INTEREST RATES. A money market fund's yield is affected by
interest rate changes. When rates decline, the Fund's yield may tend to
be somewhat higher than prevailing market rates. When rates rise, the
Fund's yield may tend to be somewhat lower.
ISSUER DEFAULT. We may not be able to maintain a $1 per share value if
the issuers of securities do not make their principal or interest
payments on time. We attempt to minimize the risk of default by
purchasing only highly-rated securities.
OTHER ADVERSE CONDITIONS. The Fund's performance may be affected by
changes in market, economic, political, or other conditions. Companies
offering securities we invest in may also be affected by these conditions
as well as by government regulations and interest rate volatility.
YEAR 2000 COMPLIANCE. Many computer software systems cannot distinguish
the year 2000 from 1900. This is known as the "Year 2000 Problem." The
systems' inability to tell the difference could cause accounting and
other problems. Our software vendors and service providers have assured
us, although not guaranteed, that their systems will be adapted in time
to avoid serious problems. We do not expect Year 2000 conversion costs to
have an impact on the Fund because these costs are borne primarily by the
Fund's vendors and service providers, and not directly by the Fund.
PAST PERFORMANCE
The Fund began operations on March 23, 1998. The Fund's performance
results have not been provided because it has not been in existence for a
full calendar year. For the current yield, call 1-888-889-0799.
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<PAGE>
UNDERSTANDING EXPENSES
FEE TABLE
This table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. You pay no sales charges or transaction fees for
buying or selling shares of the Fund.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<S> <C> <C> <C>
Management Fee 0.25%
Other Expenses
Service Fee 0.25%
Miscellaneous Expenses 0.28%
Total Other Expenses 0.53%
---------
Total Fund Operating Expenses* 0.78%
</TABLE>
*The investment manager has voluntarily agreed to limit its fees or
reimburse the Fund for expenses to the extent necessary to keep Total
Fund Operating Expenses at, or below 0.63%. For the past year, after
reductions and reimbursements, shareholders paid actual total Fund
operating expenses of 0.63%. The investment manager may remove this
limit at any time and may recoup the expenses it has reduced or
absorbed.
The Management Fee is an annual fee, payable monthly out of the Fund's
net assets.
FEE EXAMPLE
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other money market funds. It assumes
that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example
also assumes that your investment has a 5% return each year and that the
Fund's operating expenses of 0.78% (calculated before any fee reductions
and, or expense reimbursements) remain the same. Your actual costs may be
higher or lower. The example should not be considered a representation of
past or future expenses or performance.
Based on these assumptions your costs would be:
<TABLE>
<S> <C> <C> <C>
1 Year $80 5 Years $433
3 Years $249 10 Years $966
</TABLE>
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<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
The Fund's investment manager, Berkeley Capital Management ("BCM"), is
located at 650 California Street, Suite 2800, San Francisco, California
94108. BCM and its predecessor organizations have been in the investment
management business since 1972, and currently provide investment
management services to institutional and other investors for fixed income
securities, equity securities of large cap issuers, and asset allocation
strategies. As of December 31, 1998, BCM had assets totaling
approximately $2.0 billion under discretionary management.
TRANSFER AGENT
Firstar Mutual Fund Services, LLC is the transfer agent and shareholder
services agent for the Fund. They are located at P.O. Box 701, Milwaukee,
Wisconsin 53201-0701 and can be reached at 1-888-889-0799.
PRINCIPAL UNDERWRITER
Berkeley International Securities Corporation, 650 California Street,
Suite 2800, San Francisco, California 94108, is the Fund's principal
underwriter.
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<PAGE>
ACCOUNT POLICIES
HOW WE PRICE SHARES. Shares are priced at net asset value ("NAV") which
is expected to remain constant at a dollar. The NAV is calculated by
adding the values of all securities and other assets of the Fund,
subtracting the liabilities, and dividing the net amount by the number of
outstanding shares. Securities are valued at amortized cost, which
approximates market value.
WHEN SHARES ARE PRICED. NAV calculations are made once each day, after
the close of trading on the New York Stock Exchange (usually 4:00 p.m.
Eastern Time). Shares are not priced on any days when either the New York
Stock Exchange or the Federal Reserve Bank's Fedline System is closed.
REPORTING FUND PERFORMANCE. From time to time the Fund may advertise its
yield and effective yield. Performance figures are based upon historical
results and are not intended to indicate future performance.
If you have any questions about the Fund, please call the transfer agent,
Firstar Mutual Fund Services, LLC ("Firstar") at 1-888-889-0799.
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<PAGE>
UNDERSTANDING EARNINGS AND TAXES
DECLARING AND PAYING DIVIDENDS. Dividends are declared each day the NAV
is calculated. Dividends and net capital gains (if any) normally are paid
on the last business day of each month.
WHEN DO DIVIDENDS ACCRUE? Your dividends begin to accrue on the day of
purchase for shares bought before 1:30 p.m. Eastern Time. They begin to
accrue on the following day for shares purchased after 1:30 p.m. Eastern
Time. You will not be credited with dividends for shares on the day you
sell them.
DISTRIBUTION OPTIONS. You may choose to receive your distributions in
one of two ways:
- Your dividends will be automatically reinvested in
additional full or fractional shares, unless you
instruct Firstar otherwise.
- You may receive dividends by mail, but only if you
instruct Firstar to do so. Checks will normally be
mailed to you on the business day after distributions
are credited to your account.
To change your distribution option, call Firstar at 1-888-889-0799.
TAX CONSIDERATIONS. Generally, all distributions, whether received in
cash or reinvested in additional shares of the Fund, may be subject to
federal and state income tax. Dividends, distributions, purchases, and
sales will appear on your account statements. You will be notified at
least annually about the federal income tax consequences of distributions
made each year. Be sure to consult your own tax advisor about the
specific tax implications of your investments.
BACKUP WITHHOLDING. You must provide your social security or tax
identification number on your account application form and specify
whether or not you are subject to backup withholding. Otherwise, you may
be subject to backup withholding at a rate of 31%.
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<PAGE>
HOW TO BUY AND SELL SHARES
Here are the details you should know about opening an account, and buying
and selling shares:
HOW TO PLACE AN ORDER. You may place an order with:
- the transfer agent, Firstar;
- an approved broker-dealer; or
- any other approved financial institution.
ORDERING THROUGH A BROKER-DEALER OR FINANCIAL INSTITUTION. If you place
an order with anyone other than Firstar, you must resolve any purchase or
sale-related issues directly with that entity. Other financial
institutions may offer different services and charge additional fees.
WHEN ORDERS WILL BE COMPLETED. If Firstar receives your purchase order
before 1:30 p.m., Eastern Time, the order will be executed that same day.
Orders received after 1:30 p.m., Eastern Time will be executed the
following business day. Your shares will be bought only after Firstar
receives a properly completed order with full payment.
PURCHASE MINIMUMS. You may buy shares for:
- an initial amount of $100,000; and,
- additional investments of $1,000 or more.
Exceptions may be made at our discretion.
MINIMUM ACCOUNT BALANCES. Accounts of less than $100,000 are expensive
to maintain. Therefore, if you sell an amount of shares that drops your
account balance below the minimum, you may be asked to add money to the
account to raise it above the minimum balance. If, after 30 days, the
account balance remains below the minimum, your shares may be sold and
your account closed without your consent. The proceeds will be mailed to
you.
PAYMENT RESTRICTIONS. We only accept payments in U.S. funds. Checks must
be drawn on a U.S. bank, savings and loan association, or credit union.
Cash and third-party checks will not be accepted. Firstar charges a $25
fee against your account for a returned check or stop payment request.
WIRING FEE. We do not charge a fee for buying shares by wire, although
Firstar charges a $12 fee for wiring redemption proceeds. The financial
institution placing your order may charge its own wiring fees.
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<PAGE>
OPENING AN ACCOUNT
To open an account, complete and sign an account application and mail it
to:
Berkeley Money Market Fund
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
or, if you send your application by overnight courier, address it to:
Berkeley Money Market Fund
c/o Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202
ADDITIONAL REQUIREMENTS. If additional information is required, your
application will be considered incomplete until Firstar receives the
missing information. We reserve the right to reject any applications we
feel might adversely affect the Fund.
BUYING SHARES
FIRST TIME PURCHASES. Your initial purchase must be made by mail.
Include a check made payable to "Berkeley Money Market Fund" and a
completed application. After that, you may place orders by wiring or
mailing money to Firstar.
BY MAIL. Orders in writing must include:
- your account number or a completed and signed
application; and
- the dollar amount of shares you want to buy.
Mail your order to the address on the back cover. Mailed purchase orders
may not be revoked, modified or canceled.
BY WIRE. Call Firstar at 1-888-889-0799 to buy shares by wire. Wires
must be received by Firstar through the Federal Reserve Wire System
before it closes (generally, 4:00 p.m. Eastern Time) or Firstar will not
be able to process your order that day.
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<PAGE>
SELLING SHARES
GENERAL RESTRICTIONS. We may suspend the right to sell shares or
postpone payment for a sale of shares when either the New York Stock
Exchange or the Federal Reserve Bank's Fedline System is closed or
restricted. We reserve the right to reject any order that does not have
the required information, as explained below.
PAYMENT MAY BE DELAYED. If you buy shares by check and sell them before
your check clears, we will not send your proceeds until the check clears
your bank. This delay may take up to 12 days from the date of your
purchase. (You can avoid this delay by purchasing shares by wire.)
WHEN CHECKS ARE MAILED. Normally, a check will be mailed to you within
one or two business days, but no later than the seventh business day
after Firstar receives your sell order in proper form. Once a check is
mailed, the sale is irrevocable and may not be modified or canceled.
WHERE CHECKS ARE MAILED. Money from the sale of your shares may be sent
to your designated bank account via the Federal Reserve Wire System, or
to your address of record. Checks will not be sent to third parties other
than the bank or brokerage account listed on your account application;
nor will they be forwarded by the U.S. Postal Service.
CHANGING YOUR MONEY'S DESTINATION. To change your designated bank
account, write to Firstar and include the name and address of the new
bank and your account number. Be sure to include an acceptable signature
guarantee.
SIGNATURE GUARANTEE REQUIREMENT. We require a signature guarantee on any
sale you request in writing if:
- you change the bank or brokerage account from the one
listed on your account application, or
- the address of record has changed within the last 15
days.
The guarantor must be authorized by state law to guarantee signatures. A
bank or broker-dealer is acceptable; a notary public is not.
ADDITIONAL SIGNATURE REQUIREMENT. Sale orders placed by a corporation,
partnership, trust, fiduciary, executor, or administrator require
additional written evidence of authority. Call Firstar at 1-888-889-0799
if you need assistance.
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<PAGE>
OTHER REDEMPTION OPTIONS. Under conditions where cash redemptions are
detrimental to the Fund and its shareholders, we reserve the right to
make redemptions in readily marketable securities other than cash. Please
see the SAI for a more detailed discussion.
BY MAIL. Send a written request including:
- your name;
- your account number;
- the number of shares you want to sell; and
- the signature of all registered account holders exactly
as they appear on the account.
BY TELEPHONE. Call Firstar at 1-888-889-0799 and give them:
- your name and account number;
- your social security number/tax identification number;
and
- the number of shares you want to sell.
CONFIRMING AUTHENTICITY. Firstar will make every effort to verify that
an order is authentic. To do so, they may:
- ask for a form of personal identification or written
confirmation of instructions; and
- tape record your telephone instructions.
The Fund and Firstar reserve the right to refuse an order if the
authenticity of the instructions cannot be reasonably confirmed.
LIABILITY. We, or Firstar may be liable for losses from unauthorized or
fraudulent orders only if reasonable steps are not taken to verify an
order's authenticity.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you
understand the Fund's financial performance for the period of March 23,
1998 (1) through October 31, 1998. Most of the information reflects
results based on one share of the Fund. The total return shown below
represents the rate an investor would have earned from an investment in
the Fund, assuming all dividends and distributions were reinvested. This
information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, are included in the 1998
annual report (available upon request; see the back cover of this
prospectus).
<TABLE>
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $1.00
----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.03
----
Total from investment operations 0.03
----
LESS DISTRIBUTION TO SHAREHOLDERS:
Dividends from net investment income (0.03)
----
Total distributions (0.03)
----
NET ASSET VALUE AT END OF PERIOD $1.00
----
----
TOTAL RETURN (NOT ANNUALIZED) 3.11%
SUPPLEMENTAL DATA AND RATIOS:
Net assets at end of period $133,427,960
Ratio of net expenses to average net assets (2) 0.63%
Ratio of net investment income to average net
assets (2) 4.99%
</TABLE>
(1) Commencement of operations.
(2) Annualized. Net of fees waived amounting to 0.15% of average net
assets.
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<PAGE>
IMPORTANT TERMS TO KNOW
KEY DEFINITIONS
"We", "Us" and "Our" means the Berkeley Money Market Fund.
"You" and "Your" means the prospective investor or current shareholder.
IMPORTANT TERMS TO KNOW
"Liquidity" means the ability to turn investments into cash.
"Quality" means the credit rating given to a security by a nationally
recognized rating organization.
"Yield" means the interest rate you would receive if you kept your
investment in the Fund for a year. It is based on the current interest
rate for a trailing seven-day period.
"Effective Yield" means the interest rate, compounded weekly, you would
receive if you kept your investment in the Fund for a year.
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<PAGE>
FOR MORE INFORMATION
BERKELEY MONEY MARKET FUND
Additional information is available free of charge in the Statement of
Additional Information ("SAI"). The SAI is incorporated by reference
(legally considered part of this document). Additional information about
the Fund's performance is available in the Fund's Annual Report. To
receive a free copy of this prospectus, the SAI, or the Annual Report,
please contact:
Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-888-889-0799
Documents will be sent within
three business days of receipt of
your request.
INFORMATION ABOUT THE FUND MAY BE REVIEWED AND COPIED:
- at the SEC's Public Reference Room in Washington, D.C.
(1-800-SEC-0330);
- on the Commission's Internet site
(http://www.sec.gov); or
- by written request (including duplicating fee) to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009.
FOR THE CURRENT SEVEN-DAY YIELD, OR IF YOU HAVE QUESTIONS ABOUT OUR FUND, PLEASE
CALL 1-888-889-0799.
Investment Company Act file number: 811-07923
[LOGO]
BERKELEY MONEY MARKET FUND
PROSPECTUS
DATED FEBRUARY 28, 1999
<PAGE>
Rule 497(e)
File Nos. 333-16093
and 811-0792
STATEMENT OF ADDITIONAL INFORMATION
BERKELEY FUNDS
650 California Street, Suite 2800, San Francisco, CA 94108
BERKELEY MONEY MARKET FUND
February 28, 1999
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Berkeley Money Market Fund (the "Fund") Prospectus dated
February 28, 1999, which may be amended from time to time. The Fund is a
diversified investment portfolio of Berkeley Funds (the "Trust"), an open-end,
management investment company.
To obtain a free copy of the above-referenced Prospectus, please contact Firstar
Mutual Fund Services, LLC (the "Transfer Agent") at 1-888-889-0799.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT TECHNIQUES. . . . . . . . . . . . . . . . . . . . . . . . . . .2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .6
RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . 10
PORTFOLIO TRANSACTIONS AND TURNOVER. . . . . . . . . . . . . . . . . . . 15
DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 16
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . 19
YIELD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . . . . . . 20
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . 21
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 22
APPENDIX - RATINGS OF INVESTMENT SECURITIES. . . . . . . . . . . . . . .A-1
</TABLE>
<PAGE>
INVESTMENT TECHNIQUES
The Fund invests exclusively in the following types of U.S. dollar-denominated
money market instruments which are deemed to mature in 397 days or less in
accordance with federal securities regulations and which the Investment Manager
has determined present minimal credit risk:
- Certificates of deposit, time deposits, notes and bankers' acceptances
of U.S. domestic banks (including their foreign branches), Canadian
chartered banks, U.S. branches of foreign banks and foreign branches
of foreign banks having total assets of $5 billion or greater.
- Commercial paper, including asset-backed commercial paper, rated in
one of the two highest rating categories by Moody's Investors Services
("Moody's) Standard and Poor's Corporation ("S&P") Duff and Phelps
Credit Rating Co. ("Duff"), Fitch Investors Service, Inc. ("Fitch"),
or any other nationally recognized statistical rating organization
("NRSRO"), or commercial paper or notes of issuers with an unsecured
debt issue outstanding currently rated in one of the two highest
rating categories by any NRSRO where the obligation is on the same or
a higher level of priority and collateralized to the same extent as
the rated issue.
- The Fund may also invest in other corporate obligations such as
publicly traded bonds, debentures, and notes rated in one of the two
highest rating categories by any NRSRO and other similar securities
which, if unrated by any NRSRO, are determined by the Investment
Manager, using guidelines approved by the Trust's Board of Trustees,
to be at least equal in quality to one or more of the above referenced
securities.
- Obligations of, or guaranteed by, the U.S. or Canadian governments,
their agencies or instrumentalities.
- Repurchase agreements involving obligations that are suitable for
investment under the categories listed above.
ASSET-BACKED COMMERCIAL PAPER. The Fund can invest a portion of its assets in
asset-backed commercial paper and other money market fund Eligible Securities
(as that term is defined on page 7). The credit quality of most asset-backed
commercial paper depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities), and the amount and quality of any credit support provided to the
securities.
Repayment of asset-backed commercial paper is intended to be obtained from an
identified pool of assets including automobile receivables, credit-card
receivables, and other types of assets. Asset-backed commercial paper is issued
by a special purpose vehicle (usually a corporation) that has been established
for the purpose of issuing the commercial paper and purchasing the underlying
pool of assets. The issuer of commercial paper bears the direct risk of
prepayment on the receivables constituting the underlying pool of assets.
To lessen the effect of failures by obligors on these underlying assets to make
payments, such securities may contain elements of credit support. Credit support
for asset-backed securities may be based on the underlying assets or credit
enhancements provided by a third party. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees, and
over-collateralization.
2
<PAGE>
Credit support falls into two classes: liquidity protection and protection
against ultimate default on the underlying assets. Liquidity protection refers
to the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures payment on at least
a portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies, or letters of credit obtained from third
parties, through various means of structuring the transaction, or through a
combination of such approaches. The degree of credit support provided on each
issue is based generally on historical information respecting the level of
credit risk associated with such payments. Delinquency or loss in excess of
that anticipated could adversely affect the return on an investment in an
asset-backed security.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities. These
types of securities represent a direct or indirect participation in, or are
secured by and payable from, pools of assets, such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
personal property, and receivables from revolving credit (e.g., credit card)
agreements. Payments or distributions of principal and interest on asset-backed
securities may be supported by credit enhancements, such as various forms of
cash collateral accounts or letters of credit. These securities are subject to
the risk of prepayment. Prepayments of principal of asset-backed securities
affect the average life of the asset-backed securities in the Fund's portfolio.
Prepayments are affected by the level of interest rates and other factors,
including general economic conditions. In periods of rising interest rates, the
prepayment rate tends to decrease, lengthening the average life of a pool of
asset-backed securities. In periods of falling interest rates, the prepayment
rate tends to increase, shortening the average life of a pool. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, affecting the Fund's yield. Thus, asset-backed securities may have
less potential for capital appreciation in periods of falling interest rates
than other fixed-income securities of comparable duration, although they may
have a comparable risk of decline in market value in periods of rising interest
rates. Payment of principal and interest may be largely dependent upon the cash
flows generated by the assets backing the securities.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper and other
securities that are issued in reliance on the so-called "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act") ("Section 4(2) paper"). Federal securities
laws restrict the disposition of Section 4(2) paper. Section 4(2) paper
generally is sold to institutional investors such as the Fund who agree that
they are purchasing the paper for investment and not for public distribution.
Any resale of Section 4(2) paper by the purchaser must be in an exempt
transaction and may be accomplished in accordance with Rule 144A under the 1933
Act. Section 4(2) paper normally may be resold to other institutional investors
such as the Fund through or with the assistance of the issuer or investment
dealers who make a market in the Section 4(2) paper, thus providing liquidity.
Because it is not possible to predict with assurance exactly how this market for
Section 4(2) paper sold and offered under Rule 144A will continue to develop,
the Investment Manager, pursuant to guidelines approved by the Trust's Board of
Trustees, will monitor the Fund's investments in these securities, focusing on
such important factors, among others, as valuation, liquidity, and availability
of information.
RULE 144A SECURITIES. Rule 144A under the 1933 Act establishes a safe harbor
from the registration requirements of the 1933 Act for resales of certain
securities to qualified institutional buyers. Institutional markets for
restricted securities sold pursuant to Rule 144A in many cases provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. Such markets might
include automated systems for the trading, clearance, and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities, however, could adversely affect the
marketability of such portfolio securities and result in the Fund's inability to
dispose of such securities promptly or at favorable prices.
3
<PAGE>
The Board of Trustees may, in the future, delegate the function of making
day-to-day determination of liquidity to the Fund's Investment Manager pursuant
to guidelines approved by the Board. The Investment Manager will take into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trades for the security, (ii) the number of
dealers that quote prices for the security, (iii) the number of dealers that
have undertaken to make a market in the security, (iv) the number of other
potential purchasers, and (v) the nature of the security and how trading is
effected (e.g., the time needed to see the security, how bids are solicited, and
the mechanics of transfer). To the extent the Investment Manager, according to
guidelines approved by the Board, determines a Rule 144A-eligible security to be
liquid, such a security, would not be subject to the Fund's percentage limit on
illiquid securities investment.
ILLIQUID SECURITIES. The Fund will not purchase illiquid securities, including
time deposits and repurchase agreements maturing in more than seven days, if, as
a result of the purchase, more than 10% of the Fund's net assets valued at the
time of the transaction are invested n such securities. The Fund will monitor
the level of liquidity and take appropriate action, if necessary, to attempt to
maintain adequate liquidity. The investment policy on the purchase of illiquid
securities is nonfundamental.
BANK NOTES. The Fund may invest in bank notes, which are unsecured promissory
notes representing debt obligations that are issued by banks in large
denominations.
INVESTMENT COMPANIES. The Fund may invest up to 10% of its total assets in
shares of other investment companies investing exclusively in securities in
which it may otherwise invest. The Fund does not intend to invest in investment
companies unless, in the Investment Manager's judgment, the potential benefits
exceed associated costs. As a shareholder in an investment company, the Fund
bears its ratable share of that investment company's expenses, including
advisory and administration fees. The Investment Manager has agreed to waive
its own fee with respect to the portion of the Fund's assets invested in other
open-end investment companies.
TAX-EXEMPT COMMERCIAL PAPER. Tax-exempt commercial paper is unsecured
short-term obligations issued by a government or political sub-division thereof.
It is not currently expected that the Fund will invest more than 5% of its net
assets in tax-exempt commercial paper.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. Before investing in
Eurodollar certificates of deposit, the Fund will consider their marketability,
possible restrictions on international currency transactions, and any
regulations imposed by the domicile country of the foreign issuer. Eurodollar
certificates of deposit may not be subject to the same regulatory requirements
as certificates of deposit issued by U.S. banks, and associated income may be
subject to the imposition of foreign taxes, including withholding taxes.
Investments in securities of foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political,
and legal developments, including expropriation of assets or nationalization,
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against foreign entities.
Furthermore, issuers of foreign securities are subject to different, often less
comprehensive, accounting, reporting, and disclosure requirements than domestic
issuers. The securities of some foreign companies and foreign securities markets
are less liquid and at times more volatile than securities of comparable U.S.
companies and U.S. securities markets. Foreign brokerage commissions and other
fees are also generally higher than in the United States. There are also special
tax considerations which apply to securities of foreign issuers and securities
principally traded overseas. All such securities will be U.S. dollar
denominated.
4
<PAGE>
REPURCHASE TRANSACTIONS. The Fund may engage in repurchase agreements, which
are instruments under which the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby determining the yield during the Fund's holding period. Maturity of the
securities subject to repurchase agreements may exceed one year.
If the seller in a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing its rights, and could experience
losses, including a decline in the value of the underlying securities and loss
of income. The Fund will enter into repurchase agreements only with banks and
broker-dealers that the Investment Manager deems creditworthy.
It is not currently anticipated that the Fund will engage in reverse repurchase
agreements.
VARIABLE RATE SECURITIES. The Fund may invest in instruments having rates of
interest that are adjusted periodically, or which "float" continuously
according to formulas intended to minimize any fluctuation in the values of
the instruments ("Variable Rate Securities"). The interest rate of Variable
Rate Securities ordinarily is determined by reference to, or is a percentage
of, an objective standard such as a bank's prime rate, the 90-day U.S.
Treasury Bill rate, or the rate of return on commercial paper or bank
certificates of deposit. As interest rates decrease or increase, Variable
Rate Securities can be expected to experience less appreciation or
depreciation than fixed-rate obligations.
Some Variable Rate Securities ("Variable Rate Demand Securities") have a
demand feature entitling the purchaser to resell the securities at an amount
approximately equal to amortized cost, or the principal amount thereof plus
accrued interest. As is the case for other Variable Rate Securities, the
interest rate on Variable Rate Demand Securities varies according to some
objective standard intended to minimize fluctuation in the values of the
instruments. The Fund determines the maturity of Variable Rate Securities in
accordance with Securities and Exchange Commission ("SEC") rules.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a "when-issued" or "delayed delivery" basis. When-issued or
delayed delivery securities are securities purchased for future delivery at a
stated price and yield. The Fund generally will not pay for such securities
or start earning interest on them until they are received. Securities
purchased on a when-issued or delayed delivery basis are recorded as an
asset. The value of such securities may change as the general level of
interest rates changes.
The Fund will not invest more than 25% of its assets in when-issued or
delayed delivery securities. The Fund will not purchase these types of
securities for speculative purposes and will expect to acquire the securities
when purchased. However, the Fund reserves the right to sell any of these
securities before their settlement dates if the Investment Manager deems such
a sale advisable.
BORROWING POLICY. The Fund may not borrow money except as a temporary measure
for extraordinary or emergency purposes, and then only in an amount up to
one-third of the value of its total assets in order to meet redemption requests
without immediately selling any portfolio securities. The Fund will not borrow
for leverage purposes or purchase securities or make investments while
borrowings are outstanding. If for any reason the current value of the total
assets of the Fund falls below an amount equal to three times the amount of
indebtedness for money borrowed, the Fund will, within three days, (not
including Sundays and holidays), reduce its indebtedness to the extent necessary
to meet that limitation. Any borrowings under this provision will not be
collateralized.
5
<PAGE>
INVESTMENT RESTRICTIONS
EXCEPT AS OTHERWISE NOTED WITH AN *, THE RESTRICTIONS BELOW ARE NONFUNDAMENTAL
AND CAN BE CHANGED WITHOUT APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING VOTING SECURITIES (AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED, HEREINAFTER THE "1940 ACT") OF THE FUND. THE FUND MAY NOT:
(1)* Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result
thereof, more than 5% of the value of its assets would be invested in the
securities of such issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(3)* Concentrate 25% or more of the value of its total assets in any one
industry; provided, however, that the Fund may invest up to 100% of its assets
in certificates of deposit or bankers' acceptances issued by domestic branches
of U.S. banks and U.S. branches of foreign banks (which the Fund has determined
to be subject to the same regulation as U.S. banks), or obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities in
accordance with its investment objective and policies.
(4) Enter into repurchase agreements if, as a result thereof, more than 10% its
net assets valued at the time of the transaction would be subject to repurchase
agreements maturing in more than seven days and invested in securities
restricted as to disposition under the federal securities laws (except
commercial paper issued under Section 4(2) of the Securities Act of 1933). The
Fund will invest no more than 10% of its net assets in illiquid securities.
(5) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except (i) commercial paper
issued under Section 4(2) of the Securities Act of 1933 and (ii) liquid Rule
144A - eligible restricted securities).
(6)* Invest in commodities or commodity contracts, futures contracts, real
estate or real estate limited partnerships, although it may invest in securities
which are secured by real estate and securities of issuers which invest or deal
in real estate.
(7) Invest for the purpose of exercising control or management of another
issuer.
(8) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization, or acquisition of assets, or as
may otherwise be permitted by the prospectus and the 1940 Act.
(9)* Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objectives and
policies).
(10)* Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the value of
its total assets in order to meet redemption requests without immediately
selling any portfolio securities. The Fund will not borrow for leverage
purposes or purchase securities or make investments while borrowings are
outstanding. Any borrowings by the Fund will not be collateralized. If for any
reason the current value of the total assets of the Fund falls below an
6
<PAGE>
amount equal to three times the amount of indebtedness for money borrowed, the
Fund will, within three business days, reduce its indebtedness to the extent
necessary to meet that limitation.
(11) Write, purchase, or sell puts, calls, or combinations thereof.
(12) Make short sales of securities or purchase any securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions.
(13)* Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter under the federal securities laws in connection with
the disposition of securities from its investment portfolio.
(14)* Issue senior securities as defined in the 1940 Act.
Except for restrictions (3), (4) and (10), if a percentage restriction is
adhered to at the time of investment, a later increase in percentage resulting
from a change in values or net or total assets will not be considered a
violation of that restriction.
The Fund will only purchase securities that the Investment Manager has
determined, according to procedures approved by the Board and factors set forth
in Rule 2a-7 under the Investment Company Act of 1940, to present minimal credit
risk and which are First Tier or Second Tier Securities (otherwise referred to
as "Eligible Securities"). An Eligible Security is:
(1) a security with a remaining maturity of 397 days or less: (a) that is rated
by the requisite nationally recognized statistical rating organizations
("NRSROs") designated by the Securities and Exchange Commission (the "SEC")
(currently Moody's Investors Service ("Moody's"), Standard & Poor's Ratings
Group ("S&P"), Duff and Phelps Credit Rating Co. ("Duff"), Fitch Investors
Service, Inc. ("Fitch"), Thomson BankWatch, and, with respect to debt
issued by banks, bank holding companies, United Kingdom building societies,
broker-dealers and broker-dealers' parent companies, and bank-supported
debt, IBCA Limited and its affiliate, IBCA, Inc.) in one of the two highest
rating categories for short-term debt obligations (two NRSROs are required
but one rating suffices if only one NRSRO rates the security), or (b) that
itself was unrated by any NRSRO, but was issued by an issuer that has
outstanding a class of short-term debt obligations (or any security within
that class) meeting the requirements of subparagraph 1(a) above that is of
comparable priority and security;
(2) a security that at the time of issuance was a long-term security but has a
remaining maturity of 397 days or less, and whose issuer received a rating
within one of the two highest rating categories from the requisite NRSROs
for short-term debt obligations with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable in
priority and security with the subject security; or
(3) a security not rated by an NRSRO but deemed by the Investment Manager,
pursuant to guidelines adopted by the Trust's Board of Trustees, to be of
comparable quality to securities described in (1) and (2) above and to
represent minimal credit risk.
A First Tier Security is any Eligible Security that carries (or if other
relevant securities issued by its issuer carry) top NRSRO ratings from at least
two NRSROs (a single top rating suffices if only one NRSRO rates the security),
that has been determined by the Investment Manager, pursuant to guidelines
adopted by the Trust's Board of Trustees, to be of comparable quality to such a
security, that is a security issued by a
7
<PAGE>
registered investment company that is a money market fund, or that is a U.S.
government security (a "Government security"). A Second Tier Security is any
other Eligible Security.
The Fund will limit its investments in the First Tier Securities of any one
issuer to no more than 5% of its total assets. (Repurchase agreements
collateralized by non-Government securities will be taken into account when
making this calculation.) Moreover, the Fund's total holdings of Second Tier
Securities will not exceed 5% of its total assets, with investment in the Second
Tier Securities of any one issuer being limited to the greater of 1% of the
Fund's total assets or $1 million. In addition, the underlying
securities involved in repurchase agreements collateralized by non-Government
securities will be First Tier Securities at the time the repurchase agreements
are executed.
8
<PAGE>
RISK CONSIDERATIONS
The Fund's portfolio will be affected by general changes in interest rates which
will result in increases or decreases in the market value of the obligations
held by the Fund. The market value of the obligations in the Fund's portfolio
can be expected to vary inversely to changes in prevailing interest rates.
Investors also should recognize that, in periods of declining interest rates,
the Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates, the Fund's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Fund from the continuous sale of its shares will likely be invested
in portfolio instruments producing lower yields than the balance of its
portfolio, thereby reducing the Fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which the Fund may invest may not yield as high a level of current income as
might be achieved by investing in securities with less liquidity and safety and
longer maturities.
The value of commercial paper and other securities in the Fund's portfolio may
be adversely affected by the inability of the issuers (or related supporting
institutions) to make principal or interest payments on the obligations in a
timely manner. As discussed above, the Fund will invest in securities which the
Investment Manager has determined, according to procedures approved by the
Board, and factors set forth under Rule 2a-7 under the Investment Company Act of
1940, as amended, to present minimal credit risk. The ratings assigned to
commercial paper and other corporate obligations, as well as the guidelines
approved by the Trust's Board of Trustees, are intended to enable the Investment
Manager to minimize the credit risk with respect to the securities in the Fund's
portfolio, but there can be no absolute assurance that the Investment Manager
will be successful in this regard. If issuer defaults nevertheless occur
respecting a sufficiently large portion of the Fund's portfolio, the Fund may be
unable to maintain a stable net asset value of $1.00 per share.
The Fund's performance also may be affected by changes in market or economic
conditions and other circumstances affecting the financial services industry.
Government regulation of banks, savings and loan associations, and finance
companies may limit both the amounts and types of loans and other financial
commitments these entities can make and the interest rates and fees they can
charge. The profitability of the financial services industry, which is largely
dependent on the availability and, cost of capital funds, has fluctuated in
response to volatility in interest rate levels. In addition, the financial
services industry is subject to risks resulting from general economic conditions
and the potential exposure to credit losses.
9
<PAGE>
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their principal occupations during the
past five years, and their affiliations, if any, with the Investment Manager or
Berkeley International Securities Corporation are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Name Age Position with the Trust for the Past Five Years
- ---- --- ----------------------- -----------------------
<S> <C> <C> <C>
Cindee Beechwood* 43 Trustee, Treasurer, and Assistant Group Financial
Principal Financial Officer Controller, London Pacific
Group Limited and Controller,
Berkeley Capital Management
(1992-present); Financial and
Operations Principal and Chief
Financial Officer, Berkeley
International Securities
(1997-present)
Bryan W. Brown 53 Trustee Financial and technological
950 Hayman Place systems consultant (1992-
Los Altos, CA 94024 present); formerly, Chief
Financial Officer, Bailard,
Biehl & Kaiser, Inc. (1980-1992)
William R. Sweet 61 Trustee Retired; formerly, Executive
81 Mt. Tiburon Road Vice President, The Bank of
Tiburon, CA 94920 California (1985-1996)
Barnett Teich 74 Trustee Retired; formerly consultant
78280 Willowrich Drive (1987-1989); prior thereto,
Palm Desert, CA 92211 First Vice President, Lehman
Management Co., Inc. (1958-1986)
Danell J. Doty* 35 Vice President and Vice President of Operations,
Secretary Berkeley Capital Management
(1995-present) and Operations
Manager, Berkeley International
Securities (1991-present)
Joseph C. Neuberger* 36 Assistant Secretary Vice President and Manager of
615 East Michigan St. Fund Administration and
Milwaukee, WI 53202 Compliance, Firstar Mutual
Fund Services, LLC (1994-
present); formerly, Manager,
Arthur Andersen LLP (1984-1994)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name Age Position with the Trust for the Past Five Years
- ---- --- ----------------------- -----------------------
<S> <C> <C> <C>
Dana L. Armour 30 Assistant Secretary Trust Officer and Compliance
615 East Michigan St. Administrator, Firstar Mutual
Milwaukee, WI 53202 Fund Services, LLC (1992-present)
</TABLE>
*These individuals are interested persons of the Trust as defined in Section
2(a)(19) of the 1940 Act. Ms. Doty is employed by the Investment Manager and
Ms. Beechwood is employed by an affiliate of the Investment Manager.
The address of each individual listed above, unless otherwise indicated, is 650
California Street, Suite 2800, San Francisco, California 94108.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation From Registrant and Fund
Name, Position From Registrant Complex Paid to Directors
- -------------- --------------- -------------------------
<S> <C> <C>
Cindee Beechwood, Trustee None None
Barnett Teich, Trustee $4,000 $4,000
Bryan W. Brown, Trustee $4,000 $4,000
William R. Sweet, Trustee $4,000 $4,000
</TABLE>
-----------------------------------
(1) Estimated for current fiscal year.
INVESTMENT MANAGER
Berkeley Capital Management serves as the Fund's discretionary investment
manager pursuant to an Investment Management Agreement dated January 22, 1997
between it and the Trust on behalf of the Fund. The Investment Manager provides
a continuous investment program including general investment and economic advice
regarding the Fund's investment strategies, manages the Fund's investment
portfolio and provides other services necessary to the operation of the Fund and
the Trust. The Investment Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and currently provides
investment management services to institutional and other investors. As of
September 30, 1998, the Investment Manager had approximately $1.8 billion of
total assets under management under several investment strategies (including
over $1 billion invested in fixed-income securities).
The Investment Management Agreement will be in effect for a two-year term from
its effective date, and thereafter will continue in effect for one-year terms,
subject to annual approval by: (1) the Trust's Board of Trustees or (2) a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund. In either event, the continuance must also be approved
by a majority of the Trust's Board of Trustees who are not parties to the
Agreement, or interested persons (as defined in the 1940 Act) of any such party,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Investment
11
<PAGE>
Management Agreement may be terminated at any time upon 60-days notice by either
party, or by a majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment (as defined in the 1940 Act).
Pursuant to the Investment Management Agreement, the Investment Manager is
entitled to receive from the Fund an annual fee, payable monthly, of 0.25% of
the Fund's average daily net assets. The Investment Management Agreement allows
the Investment Manager voluntarily to waive its fees payable under the Agreement
and to reimburse all or a portion of the Fund's expenses. The Investment
Management Agreement further provides that the Investment Manager may seek
reimbursement of any reductions made to its management fee and any payments by
the Investment Manager of operating expenses that the Fund is obligated to pay
within the three-year period following such reduction or payment, subject to the
Fund's ability to effect such reimbursement and remain in compliance with any
applicable expense limitations. The Investment Manager will generally seek
reimbursement for the oldest of any reductions and, or waivers before payment by
the Fund for fees and expenses for the current year. Such reimbursement may be
paid prior to the Fund's payment of current expenses if so requested by the
Investment Manager even if such payment may require the Investment Manager to
waive or reduce its current fees under the Investment Management Agreement or to
pay current Fund expenses.
SHAREHOLDER SERVICES AGREEMENT
The Investment Manager has entered into a Shareholder Services Agreement with
the Trust on behalf of the Fund. Pursuant to the Shareholder Services Agreement,
the Investment Manager will provide, or will arrange for others to provide,
certain specified shareholder services to shareholders of the Fund. As
compensation for the provision of such services, the Fund will pay the
Investment Manager a fee of up to 0.25% of the Fund's average daily net assets
on an annual basis, payable monthly. The Investment Manager will pay certain
banks, trust companies, broker-dealers, and other institutions (each a
"Participating Organization") out of the fees the Investment Manager receives
from the Fund under the Shareholder Services Agreement to the extent that the
Participating Organization performs shareholder servicing functions for the Fund
with respect to shares of the Fund owned from time to time by customers of the
Participating Organization. In certain cases, the Investment Manager may also
pay a fee, out of its own resources and not out of the service fee payable under
the Shareholder Services Agreement, to a Participating Organization for
providing other administrative services to its customers who invest in the Fund.
Pursuant to the Shareholder Services Agreement, the Investment Manager will
provide or arrange with a Participating Organization for the provision of the
following shareholder services: responding to shareholder inquiries; processing
purchases and redemptions of the Fund's shares, including reinvestment of
dividends; assisting shareholders in changing dividend options, account
designations, and addresses; transmitting proxy statements, annual reports,
prospectuses, and other correspondence from the Fund to shareholders (including,
upon request, copies, but not originals, of regular correspondence,
confirmations, or regular statements of account) where such shareholders hold
shares of the Fund registered in the name of the Investment Manager, a
Participating Organization, or their nominees; and providing such other
information and assistance to shareholders as may be reasonably requested by
such shareholders.
The Investment Manager may also enter into agreements with Participating
Organizations that process substantial volumes of purchases and redemptions of
shares of the Fund for their customers. Under these arrangements, the Transfer
Agent will ordinarily maintain an omnibus account for a Participating
Organization and the Participating Organization will maintain sub-accounts for
its customers for whom it processes purchases and redemptions of shares. A
Participating Organization may charge its customers a fee, as agreed upon by the
Participating Organization and the customer, for the services it provides.
Customers of participating Organizations should read the Fund's Prospectus in
conjunction with the service
12
<PAGE>
agreement and other literature describing the services and related fees provided
by the Participating Organization to its customers prior to any purchase of
shares.
EXPENSES
The Trust pays the expenses of its operations, including: the fees and expenses
of independent accountants, counsel and the custodian; the cost of reports and
notices to shareholders; the cost of calculating net asset value; registration
fees; the fees and expenses of qualifying the Trust and its shares for
distribution under federal and state securities laws; and membership dues in the
Investment Company Institute and, or other industry association membership dues.
PRINCIPAL UNDERWRITER
Pursuant to an Underwriting Agreement, Berkeley International Securities
Corporation (the "Principal Underwriter") is the principal underwriter for
shares of the Trust and is the Trust's agent for the purpose of the continuous
offering of the Fund's shares. The Principal Underwriter is an affiliate of the
Investment Manager. The Fund pays the cost for the prospectuses and shareholder
reports to be prepared and delivered to existing shareholders. The Principal
Underwriter pays such costs when the described materials are used in connection
with the offering of shares to prospective investors and for supplementary sales
literature and advertising. The Principal Underwriter receives no fee under the
Underwriting Agreement. Terms of continuation, termination, and assignment
under the Underwriting Agreement are identical to those described above with
respect to the Investment Management Agreement.
TRANSFER AGENT AND SHAREHOLDER SERVICES
Pursuant to a Transfer Agent and Shareholder Services Agreement, Firstar Mutual
Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 (the "Transfer
Agent") serves as shareholder services agent and transfer agent for the Fund.
The Transfer Agent provides information and services to the Fund's shareholders
which include reporting share ownership, sales, and dividend activity (and
associated tax consequences), responding to daily inquiries, and effecting the
transfer of Fund shares. It furnishes such office space and equipment,
telephone facilities, personnel, and informational literature distribution as is
necessary or appropriate in providing shareholder and transfer agency
information and services.
CUSTODIAN AND FUND ACCOUNTANT
Pursuant to a Custodian Agreement, Firstar Bank Milwaukee, N.A. serves as the
Custodian (the "Custodian") of the Fund's assets. Under the terms of the
Custodian Agreement, the Custodian holds and administers the securities and cash
in the Fund's portfolio.
Pursuant to a Fund Accounting Servicing Agreement, Firstar Mutual Fund Services,
LLC provides fund accounting services to the Trust and the Fund.
INDEPENDENT ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Trust's independent accountants, PricewaterhouseCoopers LLP, audit and
report on the annual financial statements of the Fund and review the Fund's
federal income tax return. PricewaterhouseCoopers LLP may also perform other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Trust. Shareholders will be sent audited annual and unaudited
semi-annual financial statements. The address of PricewaterhouseCoopers LLP is
100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin 53202.
13
<PAGE>
LEGAL COUNSEL
The validity of the shares of beneficial interest offered hereby will be passed
upon by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San
Francisco, California 94104.
14
<PAGE>
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to: pursue the objective of
the Fund in relation to movements in the general level of interest rates; invest
money obtained from the sale of Fund shares; reinvest proceeds from maturing
portfolio securities; and meet redemptions of Fund shares. Portfolio
transactions may increase or decrease the yield of the Fund depending upon
management's ability correctly to time and execute them.
The Investment Manager, in effecting purchases and sales of portfolio securities
for the account of the Fund, seeks to obtain best price and execution. Subject
to the supervision of the Board of Trustees, the Investment Manager generally
selects broker-dealers for the Fund primarily on the basis of the quality and
reliability of services provided, including execution capability and financial
responsibility.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, utilize the services
of broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
other mutual funds.
The Trust expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities.
Purchases from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
will include the spread between the bid and asked prices.
Investment decisions for the Fund are reached independently from those for other
accounts managed by the Investment Manager. Such other accounts may also make
investments in instruments or securities at the same time as the Fund. On
occasions when the Investment Manager determines the purchase or sale of a
security to be in the best interest of the Fund as well as of other clients, the
Investment Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in an attempt to obtain
the most favorable price or lower brokerage commissions and the most efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Investment
Manager in the manner it considers to be the most equitable under the
circumstances and consistent with its fiduciary obligations to the Fund and to
its other participating clients. In some cases this procedure may affect the
size or price of the position obtainable for the Fund.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the Fund's portfolio turnover
rate for reporting purposes is expected to be zero.
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DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
On each day that the Fund's net asset value per share is determined (each a
"Business Day"), the Fund's net investment income will be declared as of the
close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
time) as a dividend to shareholders of record as of the last calculation of
net asset value prior to the declaration and to shareholders investing on
that day subject to the following conditions: (1) receipt of the purchase
order by the Transfer Agent before 1:30 p.m. Eastern time; and (2) payment in
immediately available funds wired to the Transfer Agent by the close of
business the same day. Purchases made by check will begin receiving dividends
on the Business Day the Transfer Agent receives the check if the check is
received by 1:30 p.m. Eastern time, or on the following Business Day if the
check is received after 1:30 p.m. Eastern time. Shareholders will receive
dividends in additional shares unless they elect to receive cash. Dividends
will normally be reinvested monthly in full and fractional shares of the Fund
at the net asset value on the last Business Day of each month. If cash
payment is requested, checks will normally be mailed on the Business Day
following the dividend reinvestment date. The Fund will pay shareholders who
redeem all of their shares all dividends accrued to the time of the
redemption within seven days after the redemption.
The Fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of the Fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, less (2) accrued
expenses allocated to the Fund. If the Fund realizes any capital gains, they
will be distributed at least once during the year as determined by the Board of
Trustees. Any realized capital losses to the extent not offset by realized
capital gains will be carried forward. It is not anticipated that the Fund will
realize any long-term capital gains. Expenses of the Trust are accrued daily.
Should the net asset value of the Fund deviate significantly from market value,
the Board of Trustees could decide to value the investments at market value, and
any unrealized gains and losses could affect the amount of the Fund's
distributions.
FEDERAL INCOME TAXES
It is the policy of the Fund to qualify for taxation, and to elect to be taxed,
as a "regulated investment company" by meeting the requirements of Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). In order to so
qualify, the Fund will distribute each year substantially all of its investment
company taxable income (if any), its net exempt-interest income (if any), and
its net capital gains (if any), and will seek to meet certain other
requirements. Such qualification relieves the Fund of liability for federal
income taxes to the extent the Fund's earnings are distributed. By following
this policy, the Fund expects to eliminate or reduce to a nominal amount the
federal income tax to which it is subject.
In order to qualify as a regulated investment company, the Fund must, among
other things, annually (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies and (2)
diversify its holdings so that at the end of each quarter of its taxable year
(i) at least 50% of the market value of the Fund's total assets is represented
by cash or cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, in respect of any one issuer,
to a value not greater than 5% of the value of the Fund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of any other regulated
investment company) or of two or more issuers that the Fund controls, within the
meaning of the Code, and that are engaged in the same, similar or related trades
or businesses. If the Fund
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qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, the Fund must distribute annually at least (a) 90% of its
"investment company taxable income" (as that term is defined in the Code) and
(b) 90% of the excess of its (i) tax-exempt interest income over (ii) certain
deductions attributable to that income (with certain exceptions), for its
taxable year. The Fund intends to make sufficient distributions to shareholders
to meet these requirements.
If the Fund fails to distribute in a calendar year (regardless of whether it has
a non-calendar taxable year) at least 98 percent of its (i) ordinary income for
such year; and (ii) capital gain net income for the one-year period ending on
October 31 of that calendar year (or later if the Fund is permitted so to elect
and so elects), plus any retained amount from the prior year, the Fund will be
subject to a nondeductible 4% excise tax on the undistributed amounts. The Fund
intends generally to make distributions sufficient to avoid imposition of this
excise tax.
Any distributions declared by the Fund in October, November, or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year declared. The Fund may adjust its schedule for the
reinvestment of distributions for the month of December to assist in complying
with the reporting and minimum distribution requirements of the Code.
The Fund does not expect to realize any significant amount of long-term capital
gain. However, any distributions by the Fund of long-term capital gain will be
taxable to the shareholders as long-term capital gain, regardless of how long a
shareholder has held the Fund's shares.
The Fund may engage in investment techniques that may alter the timing and
character of the Fund's income. The Fund may be restricted in its use of these
techniques by rules relating to its qualification as a regulated investment
company.
The Fund may invest in some Variable Rate Demand Securities which have a feature
entitling the purchaser to resell the securities at a specified amount (a "put
option"). The Internal Revenue Service (the "IRS") has issued a revenue ruling
to the effect that, under specified circumstances, a regulated investment
company will be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS subsequently announced that it will not ordinarily issue
advance ruling letters as to the identity of the true owner of property in cases
involving the sale of securities (or participation interests therein) if the
purchaser has the right to cause the security (or participation interest
therein) to be purchased by the seller or a third party. The Fund intends to
take the position that it is the owner of any securities with respect to which
it also holds a put option.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder (1) who fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) who provides an incorrect taxpayer identification number; (3) who
is subject to withholding for failure to properly report to the IRS all payments
of interest or dividends; or (4) who fails to provide a certified statement that
he or she is not subject to "backup withholding." This "backup withholding" is
not an additional tax and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates)
generally are subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign
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shareholders of long-term capital gains and any gains from the sale or
disposition of shares of the Fund generally are not subject to U.S. taxation,
unless the recipient is an individual who meets the Code's definition of
"resident alien." Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the U.S. In addition, the
tax consequences to a foreign shareholder entitled to claim the benefits of a
tax treaty may be different than those described above. Distributions by the
Fund may also be subject to state, local and foreign taxes, and their treatment
under applicable tax laws may differ from the U.S. federal income tax treatment.
The information above is only a summary of some of the tax considerations
generally affecting the Fund and its shareholders. No attempt has been made to
discuss individual tax consequences and this discussion should not be construed
as applicable to all shareholders' tax situations. Investors should consult
their own tax advisors to determine the suitability of the Fund and the
applicability of any state, local, or foreign taxation. Paul, Hastings,
Janofsky & Walker has expressed no opinion in respect thereof. Foreign
shareholders should consider, in particular, the possible application of U.S.
withholding taxes on certain taxable distributions from the Fund at rates up to
30% (subject to reduction under certain income tax treaties).
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SHARE PRICE CALCULATION
The Fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of the Fund's investments at amortized cost with market values.
Market valuations are obtained by using actual quotations provided by market
makers, estimates of market value, or values obtained from yield data relating
to classes of money market instruments published by reputable sources at the bid
prices for the instruments. The amortized cost method of valuation seeks to
maintain a stable $1.00 per share net asset value even where there are
fluctuations in interest rates that affect the value of portfolio instruments.
Accordingly, this method of valuation can in certain circumstances lead to a
dilution of a shareholder's interest.
If a deviation of 1/2 of 1% or more were to occur between the net asset value
per share calculated by reference to market values and the Fund's $1.00 per
share net asset value, or if there were any other deviation that the Board of
Trustees of the Trust believed may result in a material dilution or other unfair
results to investors or existing shareholders, the Board of Trustees is required
to cause the Fund to take such action as it deems appropriate to eliminate or
reduce to the extent reasonably practicable such dilution or unfair results. If
the Fund's net asset value per share (computed using market values) declined, or
were expected to decline, below $1.00 (computed using amortized cost), the Board
of Trustees might temporarily reduce or suspend dividend payments in an effort
to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board of Trustees,
an investor would receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could result in
investors receiving no dividends for the period during which they hold their
shares and receiving, upon redemption, a price per share lower than that which
they paid. On the other hand, if the Fund's net asset value per share (computed
using market values) were to increase, or were anticipated to increase above
$1.00 (computed using amortized cost), the Board of Trustees might supplement
dividends in an effort to maintain the net asset value at $1.00 per share.
YIELD
The historical performance of the Fund may be shown in the form of yield and
effective yield. These measures of performance are described below.
YIELD Yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific seven-day period. This net investment
income is then annualized, which means that the net investment income generated
during the seven-day period is assumed to be generated in each seven-day period
over an annual period, and is shown as a percentage of the investment.
EFFECTIVE YIELD Effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded weekly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.
As of the Fund's fiscal year ended October 31, 1998, the Fund's 7-day yield was
4.73% and the 7-day effective yield was 4.84%.
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GENERAL INFORMATION
The Trust was organized as a business trust under the laws of Delaware on
October 28, 1996 and may issue an unlimited number of shares of beneficial
interest or classes of shares in one or more separate series. Currently, the
Trust offers shares of only one series (the Fund described in this SAI). The
Trust's Board of Trustees may authorize the issuance of shares of additional
series or classes of shares of beneficial interest if it deems it desirable.
The Trust is generally not required to hold shareholder meetings. However, as
provided in its Agreement and Declaration of Trust and its Bylaws, shareholder
meetings may be called by the Trustees for the purpose as may be prescribed by
law, the Agreement and Declaration of Trust, or the Bylaws, or for the purpose
of taking action upon any other matter deemed by the Trustees to be necessary or
desirable including changing fundamental policies, electing or removing
Trustees, or approving or amending an investment advisory agreement. In
addition, a Trustee may be removed by shareholders at a special meeting called
upon written request of shareholders owning in the aggregate at least 10% of the
outstanding shares of the Trust.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of his
or her successor or until death, resignation, declaration of bankruptcy or
incompetence by a court of competent jurisdiction, or removal by a majority vote
of the shares entitled to vote (as described below) or of a majority of the
Trustees. In accordance with the 1940 Act (i) the Trust will hold a shareholder
meeting for the election of trustees when less than a majority of the trustees
have been elected by shareholders, and (ii) if, as a result of a vacancy in the
Board of Trustees, less than two-thirds of the trustees have been elected by the
shareholders, that vacancy will be filled by a vote of the shareholders.
The Agreement and Declaration of Trust provides that one-third of the shares
entitled to vote shall be a quorum for the transaction of business at a
shareholders' meeting, except when a larger quorum is required by applicable
law, by the Bylaws or by the Agreement and Declaration of Trust, and except that
where any provision of law, of the Agreement and Declaration of Trust, or of the
Bylaws permits or requires that (i) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series; or (ii) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. The
Agreement and Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
For further information, please refer to the registration statement and exhibits
for the Trust on file with the SEC in Washington, D.C. and available upon
payment of a copying fee. The statements in the Prospectus and this Statement
of Additional Information concerning the contents of contracts or other
documents, copies of which are filed as exhibits to the registration statement,
are qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 1998, North American Trust Company, 225 Broadway, San Diego,
California, 92101, as fiduciary for its various clients, was holder of 99.9% of
the outstanding shares of the Fund.
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PURCHASE AND REDEMPTION OF SHARES
The Fund's minimum initial investment is $100,000 and subsequent investments of
$1,000 or more may be made. These minimum requirements may be changed at any
time and are not applicable to certain types of investors. Exceptions to the
minimum investment requirements may be made at the discretion of the Investment
Manager including, without limitation, for employees or affiliates of the
Investment Manager or investors who are, or are related to or affiliated with,
clients of the Investment Manager. The Fund will accept investments in cash
only in U.S. dollars.
The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order in-kind by
making payment in readily marketable securities chosen by the Fund and valued as
they are for purposes of computing the Fund's net asset value. However, the
Trust has elected to commit itself to pay in cash all requests for redemption by
any Shareholder of record, limited in amount with respect to each Shareholder
during any 90-day period to the lesser of: (i) $250,000, or (ii) one percent of
the net asset value of the Fund at the beginning of such period. If payment is
made in securities, a shareholder may incur transaction expenses in converting
these securities into cash.
To minimize administrative costs, share certificates will not be issued. Records
of share ownership are maintained by the Transfer Agent.
Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when phone lines
may become busy with calls from other investors. If you want to buy or sell
shares but have trouble reaching the Fund by telephone, you may want to use
another method for completing a transaction, even though an alternative
procedure may mean that completing your transaction may take a longer period of
time.
The Fund may be required to withhold federal income tax at a rate of 31% (backup
withholding) from dividend payments, distributions, and redemption proceeds if a
shareholder fails to furnish the Fund with his/her certified social security or
tax identification number. The shareholder also must certify that the number is
correct and that he/she is not subject to backup withholding. The certification
is included as part of the share purchase application form. If the shareholder
does not have a social security number, he/she should indicate on the purchase
form that an application to obtain the number is pending. The Fund is required
to withhold taxes if a number is not delivered to the Fund within seven days.
OTHER INFORMATION
The Prospectus of the Fund and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed with
the SEC under the Securities Act of 1933, as amended, with respect to the
securities offered by the Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Statement of Additional Information pursuant to the rules
and regulations of the SEC. The Registration Statement including the exhibits
filed therewith may be examined at the office of the SEC in Washington, DC.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
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THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST, THE FUND, OR BY THE PRINCIPAL UNDERWRITER IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
FINANCIAL STATEMENTS
Audited financial statements for the period ending October 31, 1998 for the
Berkeley Money Market Fund, as contained in the Annual Report to Shareholders of
such Fund for the period ended October 31, 1998 (the "Report") are hereby
incorporated by reference to the Report.
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APPENDIX A - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
(or related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating indicates either an overwhelming or very
strong degree of safety regarding timely payment of principal and interest.
Issues determined to possess overwhelming safety characteristics are denoted
A-1+. Capacity for timely payment on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes and variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing. Obligations
rated MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection
although not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a very
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or extraordinarily
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 these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with
Aaa rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protections, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.
A-1
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STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
A-2
