<PAGE>
RULE 497(E)
FILE NOS. 333-16093 AND 811-07923
[LOGO]
CALIFORNIA TAX EXEMPT FUND
CLASS A
PROSPECTUS
DATED MAY 1, 1999
INVESTMENT MANAGER:
CITY NATIONAL INVESTMENTS
A division of City National Bank
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.
------------------------------------------------------------------------------
MUTUAL FUND SHARES ARE NOT FDIC INSURED. MUTUAL FUND SHARES ARE
NOT BANK DEPOSITS, NOR ARE THEY OBLIGATIONS OF, OR GUARANTEED BY
CITY NATIONAL BANK. INVESTING IN MUTUAL FUNDS INVOLVES RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview................................................ 4
OUR GOALS......................................... 4
HOW WE PLAN TO ACHIEVE OUR GOALS.................. 4
TYPES OF SECURITIES............................... 4
CLASSES OF SHARES................................. 5
PRINCIPAL RISKS OF INVESTING IN OUR FUND.......... 5
PAST PERFORMANCE.................................. 6
Understanding Expenses.................................. 7
FEES AND EXPENSES OF THE FUND..................... 7
EXAMPLE........................................... 8
Management of the Fund.................................. 9
INVESTMENT MANAGER................................ 9
SUB-ADVISER....................................... 9
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER
AGENT............................................. 10
DISTRIBUTOR....................................... 10
Account Policies........................................ 11
Understanding Earnings and Taxes........................ 12
How to Buy and Sell Shares.............................. 14
HOW TO PLACE AN ORDER............................. 14
BUYING SHARES..................................... 15
SELLING SHARES.................................... 15
Important Terms to Know................................. 17
KEY DEFINITIONS................................... 17
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 the Fund should request the SAI and review
it before purchasing shares.
3
<PAGE>
OVERVIEW
OUR GOALS
The Fund is a tax exempt money market fund that seeks to preserve your
principal and maintain a high degree of liquidity while providing current
income that is exempt from federal, and to the extent possible,
California personal income tax. Also, the Fund seeks to maintain a $1.00
per share net asset value. The goals of the Fund can only be changed with
shareholder approval.
HOW WE PLAN TO ACHIEVE OUR GOALS
OUR PRINCIPAL STRATEGIES -- We purchase liquid, high-quality, short-term
California municipal money market securities. We invest at least 80% of
the Fund's net assets in municipal money market securities that pay
interest that is expected to be exempt from federal income tax and which
is not a preference item for purposes of the federal alternative minimum
tax (the "AMT"). This may mean that, although we do not intend to, up to
20% of the securities we may invest in may be subject to the AMT. We
invest at least 65% of the Fund's net assets in municipal obligations the
interest on which is exempt from California personal income tax. The
securities must have a maturity period of no more than 397 days and, in
our opinion, present minimal credit risk.
TYPES OF SECURITIES
The Fund invests primarily in money market instruments including:
- Securities that pay interest which is not a preference item for
purposes of federal alternative minimum tax;
- Municipal obligations that pay interest which is expected to be
exempt from California personal income taxes; and
- High-quality municipal bonds, notes and tax exempt commercial
paper. High-quality municipal securities are those rated within
the two highest short-term grades by nationally recognized
statistical rating organizations such as Standard & Poor's
Ratings Group and/ or Moody's Investors Services.
4
<PAGE>
Please review the SAI for more detailed descriptions of these principal
investments and other securities in which the Fund may invest in addition
to the types of securities described above.
CLASSES OF SHARES
This Prospectus offers Class A shares of the Fund. The Fund also offers
other classes of shares, which are subject to the same expenses, except
they may be subject to different distribution and/or shareholder
servicing costs.
PRINCIPAL RISKS OF INVESTING IN OUR FUND
As with any money market fund, there are risks to investing. We cannot
guarantee that we will meet our investment goals. Here are principal
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.
CALIFORNIA RISK FACTORS -- The Fund may be subject to greater risks than
other tax exempt money market funds that are diversified across issuers
located in a number of states. Because the Fund concentrates its
investments in California municipal securities, the Fund is vulnerable to
changes in California's economy that may lessen the ability of California
municipal bond issuers to pay interest and principal on their bonds.
TAXES -- Although the Fund's goal is to provide income exempt from
federal and California state personal income taxes, some of its income
may be subject to the alternative minimum tax.
5
<PAGE>
THE EFFECT OF INTEREST RATES -- A money market fund's yield is affected
by interest rate changes. When rates decline, the fund's yield will 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 $1.00 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.
DEFENSIVE INVESTMENTS -- At the discretion of the investment manager or
sub-adviser to the Fund, the Fund may invest up to 100% of its assets in
municipal obligations of states other than California or taxable money
market securities for temporary defensive purposes. Such a stance may
help the Fund minimize or avoid losses during adverse market, economic or
political conditions. During such a period, the Fund may not achieve its
investment goals.
YEAR 2000 -- Many computer systems cannot distinguish the year 2000 from
1900. This is known as the "Year 2000" problem. A computer system's
inability to tell the difference could cause problems with the handling
of securities trades, pricing and account services. Our software vendors
and service providers have assured us, but have not guaranteed, that
their systems will be adapted in time to avoid serious problems. We do
not expect Year 2000 conversion costs to have much impact on the Fund
because these costs are borne primarily by the Fund's vendors and service
providers, and not directly by the Fund. It is also important to keep in
mind that the Year 2000 problem may negatively impact the State of
California and therefore, the municipal obligations and other securities
in which the Fund invests and, by extension, the value of the shares held
by the Fund.
PAST PERFORMANCE
The Fund is a new series of the Trust and has recently commenced
operations. Therefore, no past performance information is available.
If you would like to know the current seven-day yield, call
1-888-889-0799.
6
<PAGE>
UNDERSTANDING EXPENSES
FEES AND EXPENSES OF THE FUND
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 THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C> <C>
Management Fee* 0.27%
Distribution (12b-1) Fee 0.50%
Other Expenses
Shareholder Servicing Fee 0.25%
Other Fund Expenses** 0.20%
Total Other Expenses** 0.45%
---------
Total Annual Fund Operating Expenses*** 1.22%
</TABLE>
* The "Management Fee" is an annual fee, payable monthly out of the
Fund's net assets.
** Estimated.
*** The "Total Annual Fund Operating Expenses" is an estimate and may be
higher or lower than that outlined above. The investment manager has
voluntarily agreed to limit its fees or reimburse the Fund for expenses
to the extent necessary to keep "Total Annual Fund Operating Expenses" at
or below 0.78%. Any fee reductions or reimbursements may be repaid to the
investment manager within 3 years after they occur if such repayments can
be achieved within the Fund's then current expense limit, if any, for
that year and if certain other conditions are satisfied.
7
<PAGE>
EXAMPLE
The 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 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>
1 Year 3 Years
------ ---------
$124 $387
</TABLE>
8
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
City National Bank ("CNB") is the Fund's investment manager. As
investment manager, CNB provides the Fund with investment management
services, including the selection, appointment, and supervision of the
sub-adviser to the Fund. CNB receives 0.27% of average annual total
assets of the Fund for its investment management services.
CNB, founded in the early 1950's, is a federally chartered commercial
bank with approximately $6.4 billion in assets as of December 31, 1998.
It is a wholly-owned subsidiary of City National Corporation ("CNC"), a
New York Stock Exchange listed company. CNB's address is 400 North
Roxbury Drive, Beverly Hills, California 90210.
CNB is applying for an exemptive order from the Securities and Exchange
Commission which would permit it, subject to certain conditions required
by the SEC, to replace the current sub-adviser with a new sub-adviser
with the approval of the Board of Trustees but without obtaining
shareholder approval. Shareholders, however, will be notified of any
change of the sub-adviser and be provided with information regarding the
new sub-adviser. An order from the SEC granting this exemption benefits
shareholders by enabling the Fund to operate in a less costly and more
efficient manner.
SUB-ADVISER
Weiss, Peck & Greer, L.L.C. ("WP&G") currently serves as the Fund's sub-
adviser pursuant to a sub-advisory agreement between the investment
manager and WP&G. Under the sub-advisory agreement, WP&G provides
investment advisory and portfolio management services to the Fund. WP&G
is located at One New York Plaza, New York, New York 10004. WP&G has been
in the investment management business since 1970, and engages in
investment management, venture capital management and management buyouts.
Since its founding, WP&G has been active in managing portfolios of tax
exempt
9
<PAGE>
securities. As of March 31, 1999, WP&G had assets under management
totaling approximately $15.6 billion.
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
SEI Investments Mutual Funds Services serves as administrator and fund
accountant to the Fund. SEI Investments Fund Management serves as
transfer agent for the Fund. Both companies are located at One Freedom
Drive, Oaks, Pennsylvania 19456 and can be reached at 1-888-889-0799.
DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor") serves as the Fund's
distributor pursuant to a distribution agreement with the Fund. The
Distributor is located at One Freedom Valley Drive, Oaks, Pennsylvania,
19456 and can be reached at 1-888-889-0799.
10
<PAGE>
ACCOUNT POLICIES
HOW WE PRICE SHARES -- Shares are priced at net asset value ("NAV") which
is expected to remain constant at $1.00. 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,
usually by 2:00 p.m. Eastern time. Shares may be purchased on any day
that the New York Stock Exchange and the Federal Reserve are open for
business. Shares, however, cannot be purchased by Federal Reserve wire on
days when either the New York Stock Exchange or the Federal Reserve 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 Fund at
1-888-889-0799.
11
<PAGE>
UNDERSTANDING EARNINGS AND TAXES
DECLARING AND PAYING DIVIDENDS -- Dividends are declared daily and paid
monthly. Dividends are normally paid on the last business day of each
month. Net capital gain, if any, will be paid once a year.
WHEN DO DIVIDENDS ACCRUE? -- Your dividends begin to accrue on the day of
purchase for shares bought before 2:00 p.m. Eastern time. They begin to
accrue on the following day for shares purchased after 2:00 p.m. Eastern
time. You will not be credited with dividends for shares on the day you
sell them.
DISTRIBUTION OPTIONS -- Your dividends will be automatically reinvested
in additional full or fractional shares, unless you instruct the Fund in
writing prior to the date of distribution of your election to receive
payment in cash. Your election will be effective for all dividends and
distributions paid after the Fund receives your written notice. To cancel
your election, please send the Fund another written notice. Proceeds from
distributions will normally be wired to your financial institution on the
business day after distributions are credited to your account.
TAX CONSIDERATIONS -- The Fund intends to distribute substantially all of
its net investment income (including net short-term capital gain) to
shareholders. If, at the close of each quarter of its taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
the interest on which is excludable from gross income for federal income
tax purposes, the Fund may pay "exempt-interest dividends" to its
shareholders. Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes, but may have
certain collateral federal tax consequences including alternative minimum
tax consequences.
The Fund also intends to qualify to pay dividends to shareholders that
are exempt from California personal income tax ("California
exempt-interest dividends"). The Fund will qualify to pay California
exempt-interest dividends
12
<PAGE>
if (1) at the close of each quarter of the Fund's taxable year, at least
50% of the value of the Fund's total assets consists of obligations the
interest on which would be exempt from California personal income tax if
the obligations were held by an individual ("California Tax Exempt
Obligations") and (2) the Fund continues to qualify as a regulated
investment company. The Fund will notify its shareholders of the amount
of exempt-interest dividends each year.
You will be notified at least annually about the tax consequences of
distributions made each year. BE SURE TO CONSULT YOUR TAX ADVISOR ABOUT
THE SPECIFIC TAX IMPLICATIONS OF YOUR INVESTMENTS. FOR ADDITIONAL
INFORMATION REGARDING TAX CONSIDERATIONS, SEE THE SAI.
BACKUP WITHHOLDING -- You must provide your financial institution with
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%.
13
<PAGE>
HOW TO BUY AND SELL SHARES
Here are the details you should know about buying and selling shares:
HOW TO PLACE AN ORDER
You may place an order with:
- an approved broker-dealer; or
- any other approved financial institution.
ORDERING THROUGH A BROKER-DEALER OR FINANCIAL INSTITUTION -- You may
purchase shares through accounts with brokers and other financial
institutions that are authorized to place trades in Fund shares for their
customers. If you invest through an authorized institution, you will have
to follow its procedures, which may be different from the procedures for
investing directly. Your financial institution may charge a fee for its
services, in addition to the fees charged by the Fund. You will also
generally have to address your correspondence or questions regarding the
Fund to your financial institution.
WHEN ORDERS WILL BE COMPLETED -- You may have to transmit purchase or
exchange requests to your financial institution at an earlier time for
your transaction to become effective that day. This allows the financial
institution time to process your request and transmit it to the Fund. For
more information about how to purchase or exchange fund shares through
your financial institution, you should contact your financial institution
directly.
If we receive your purchase order, through your financial institution,
before 2:00 p.m. Eastern time, the order will be executed that same day.
Orders received after 2:00 p.m. Eastern time will be executed the
following business day. Your shares will be bought, only after we receive
a properly completed order with full payment.
14
<PAGE>
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 -- If your account balance drops below $100,000
because of redemptions, the Fund may redeem your shares. However, the
Fund will always give you at least 30 days' written notice to give you
time to add to your account and avoid involuntary redemption of your
shares.
PAYMENT RESTRICTIONS -- We only accept payments by wire in U.S. funds.
Cash, checks and third-party checks will not be accepted. Consult with
your financial institution about their acceptable methods of payment.
WIRING FEE -- The financial institution placing your order may charge its
own wiring fees.
BUYING SHARES
FIRST TIME AND SUBSEQUENT PURCHASES -- You will have to follow your
broker-dealer or financial institution's procedures for transacting with
the Fund. Contact your broker-dealer or financial institution for more
information.
SELLING SHARES
GENERAL INFORMATION -- You may sell your shares by contacting your
broker-dealer or financial institution. You will have to follow their
procedures. Contact your broker-dealer or financial institution for more
information.
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's Fedline System is closed or restricted.
We reserve the right to reject any order that is not received in proper
form. For example, if we are
15
<PAGE>
unable to determine how many shares you wish to sell, we may not execute
your order.
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. In
unusual circumstances, the Fund may temporarily suspend the processing of
sell requests, or postpone payments of proceeds for up to five business
days, as permitted by federal securities laws. Please see the SAI for a
more detailed discussion.
CONFIRMING AUTHENTICITY -- We will make every effort to verify that an
order is authentic. To do so, we may:
- ask for a form of personal identification or written
confirmation of instructions; and
- tape record your telephone instructions.
We reserve the right to refuse an order if we cannot reasonably confirm
the authenticity of the instructions.
LIABILITY -- We may be liable for losses from unauthorized or fraudulent
telephone transactions only if reasonable steps are not taken to verify
an order's authenticity.
16
<PAGE>
IMPORTANT TERMS TO KNOW
KEY DEFINITIONS
"We", "Us" and "Our" means the CNI Charter California Tax Exempt Fund.
"You" and "Your" means the prospective investor or current shareholder.
"Liquidity" means the ability to turn investments into cash.
"Quality" means the credit rating given to a security by a nationally
recognized statistical 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.
17
<PAGE>
FOR MORE INFORMATION
CNI CHARTER CALIFORNIA TAX EXEMPT 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
investments is available in the Fund's Annual and Semi-Annual Reports to
shareholders. In the Fund's Annual Report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year. To receive a free copy of this
Prospectus, the SAI, or the Annual or Semi-Annual Reports (when available),
please contact:
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
1-888-889-0799
INFORMATION ABOUT THE FUND MAY BE REVIEWED AND COPIED:
- - at the SEC's Public Reference Room in Washington, D.C. at 1-800-SEC-0330;
- - on the SEC's Internet site at www.sec.gov; or
- - by written request (including duplication fee) to the Public Reference
Section of the SEC, Washington, D.C. 20549-6009.
FOR THE CURRENT SEVEN-DAY YIELD, OR IF YOU HAVE QUESTIONS ABOUT THE FUND, PLEASE
CALL 1-888-889-0799.
The Fund's Investment Company Act
file number: 811-07923.
[LOGO]
CALIFORNIA
TAX EXEMPT FUND
CLASS A
PROSPECTUS
DATED MAY 1, 1999
CNI-F-004-01
<PAGE>
Rule 497(e)
File Nos. 333-16093 and 811-07923
[LOGO]
GOVERNMENT FUND
CLASS A
PROSPECTUS
DATED MAY 1, 1999
INVESTMENT MANAGER:
CITY NATIONAL INVESTMENTS
A division of City National Bank
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.
------------------------------------------------------------------------------
MUTUAL FUND SHARES ARE NOT FDIC INSURED. MUTUAL FUND SHARES ARE
NOT BANK DEPOSITS, NOR ARE THEY OBLIGATIONS OF, OR GUARANTEED BY
CITY NATIONAL BANK. INVESTING IN MUTUAL FUNDS INVOLVES RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview................................................ 4
OUR GOALS......................................... 4
HOW WE PLAN TO ACHIEVE OUR GOALS.................. 4
TYPES OF SECURITIES............................... 4
CLASSES OF SHARES................................. 5
PRINCIPAL RISKS OF INVESTING IN OUR FUND.......... 5
PAST PERFORMANCE.................................. 6
Understanding Expenses.................................. 7
FEES AND EXPENSES OF THE FUND..................... 7
EXAMPLE........................................... 8
Management of the Fund.................................. 9
INVESTMENT MANAGER................................ 9
SUB-ADVISER....................................... 9
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER
AGENT............................................. 10
DISTRIBUTOR....................................... 10
Account Policies........................................ 11
Understanding Earnings and Taxes........................ 12
How to Buy and Sell Shares.............................. 14
HOW TO PLACE AN ORDER............................. 14
BUYING SHARES..................................... 15
SELLING SHARES.................................... 15
Important Terms to Know................................. 17
KEY DEFINITIONS................................... 17
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 the Fund should request the SAI and review
it before purchasing shares.
3
<PAGE>
OVERVIEW
OUR GOALS
The Fund is a money market fund that seeks to preserve your principal and
maintain a high degree of liquidity while providing current income. Also,
the Fund seeks to maintain a $1.00 per share net asset value. The goals
of the Fund can only be changed with shareholder approval.
HOW WE PLAN TO ACHIEVE OUR GOALS
OUR PRINCIPAL STRATEGIES -- We purchase liquid, high-quality, short-term
U.S. government and agency obligations. The securities must have a
maturity period of no more than 397 days and, in our opinion, present
minimal credit risk.
Using a top-down strategy and bottom-up security selection, we seek
securities with an acceptable maturity that are marketable and liquid and
offer competitive yields. We also consider factors such as the
anticipated level of interest rates and the maturity of individual
securities relative to the maturity of the Fund as a whole. The Fund
follows strict Investment Company Act rules about the credit quality,
maturity and diversification of its investments.
TYPES OF SECURITIES
The Fund invests exclusively in the following money market instruments
including:
- U.S. Treasury Obligations;
- Obligations issued or guaranteed as to principal and interest
by the agencies or instrumentalities of the U.S. Government;
and
- Repurchase agreements involving these obligations.
Please review the SAI for more detailed descriptions of these securities.
4
<PAGE>
CLASSES OF SHARES
This Prospectus offers Class A shares of the Fund. The Fund also offers
other classes of shares, which are subject to the same expenses, except
they may be subject to different distribution and/or shareholder
servicing costs.
PRINCIPAL RISKS OF INVESTING IN OUR FUND
As with any money market fund, there are risks to investing. We cannot
guarantee that we will meet our investment goals. Here are principal
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 will tend
to be somewhat higher than prevailing market rates. When rates rise, the
fund's yield may tend to be somewhat lower.
DEFENSIVE INVESTMENTS -- The securities in which the Fund invests, and
the strategies described in this Prospectus, are those that the Fund uses
under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, the Fund may invest up to
100% of its assets in cash or cash equivalents that would not ordinarily
be consistent with the Fund's goals.
YEAR 2000 -- Many computer systems cannot distinguish the year 2000 from
1900. This is known as the "Year 2000" problem. A computer system's
inability to tell the difference could cause problems with the handling
of securities
5
<PAGE>
trades, pricing and account services. Our software vendors and service
providers have assured us, but have not guaranteed, that their systems
will be adapted in time to avoid serious problems. We do not expect Year
2000 conversion costs to have much impact on the Fund because these costs
are borne primarily by the Fund's vendors and service providers, and not
directly by the Fund. It is also important to keep in mind that the Year
2000 problem may negatively impact the government securities in which the
Fund invests and, by extension, the value of the shares held by the Fund.
PAST PERFORMANCE
The Fund is a new series of the Trust and has recently commenced
operations. Therefore, no past performance information is available.
If you would like to know the current seven-day yield, call
1-888-889-0799.
6
<PAGE>
UNDERSTANDING EXPENSES
FEES AND EXPENSES OF THE FUND
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 THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C> <C>
Management Fee* 0.26%
Distribution (12b-1) Fee 0.50%
Other Expenses
Shareholder Servicing Fee 0.25%
Other Fund Expenses** 0.14%
Total Other Expenses** 0.39%
---------
Total Annual Fund Operating Expenses*** 1.15%
</TABLE>
* The "Management Fee" is an annual fee, payable monthly out of the
Fund's net assets.
** Estimated.
*** The "Total Annual Fund Operating Expenses" is an estimate and may be
higher or lower than that outlined above. The investment manager has
voluntarily agreed to limit its fees or reimburse the Fund for expenses
to the extent necessary to keep "Total Annual Fund Operating Expenses" at
or below 0.85%. Any fee reductions or reimbursements may be repaid to the
investment manager within 3 years after they occur if such repayments can
be achieved within the Fund's then current expense limit, if any, for
that year and if certain other conditions are satisfied.
7
<PAGE>
EXAMPLE
The 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 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>
1 Year 3 Years
------ ---------
$117 $365
</TABLE>
8
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
City National Bank ("CNB") is the Fund's investment manager. As
investment manager, CNB provides the Fund with investment management
services, including the selection, appointment, and supervision of the
sub-adviser to the Fund. CNB receives 0.26% of average annual total
assets of the Fund for its investment management services.
CNB, founded in the early 1950's, is a federally chartered commercial
bank with approximately $6.4 billion in assets as of December 31, 1998.
It is a wholly-owned subsidiary of City National Corporation ("CNC"), a
New York Stock Exchange listed company. CNB's address is 400 North
Roxbury Drive, Beverly Hills, California 90210.
CNB is applying for an exemptive order from the Securities and Exchange
Commission which would permit it, subject to certain conditions required
by the SEC, to replace the current sub-adviser with a new sub-adviser
with the approval of the Board of Trustees but without obtaining
shareholder approval. Shareholders, however, will be notified of any
change of the sub-adviser and be provided with information regarding the
new sub-adviser. An order from the SEC granting this exemption benefits
shareholders by enabling the Fund to operate in a less costly and more
efficient manner.
SUB-ADVISER
Wellington Management Company, LLP ("Wellington Management") currently
serves as the Fund's sub-adviser pursuant to a sub-advisory agreement
between the investment manager and Wellington Management. Under the
sub-advisory agreement, Wellington Management provides investment
advisory and portfolio management services to the Fund. Wellington
Management is located at 75 State Street, Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since
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1960. As of March 31, 1999, Wellington Management had discretionary
management authority with respect to approximately $215 billion in
assets.
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
SEI Investments Mutual Funds Services serves as administrator and fund
accountant to the Fund. SEI Investments Fund Management serves as
transfer agent for the Fund. Both companies are located at One Freedom
Drive, Oaks, Pennsylvania 19456 and can be reached at 1-888-889-0799.
DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor") serves as the Fund's
distributor pursuant to a distribution agreement with the Fund. The
Distributor is located at One Freedom Drive, Oaks, Pennsylvania, 19456
and can be reached at 1-888-889-0799.
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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 $1.00. 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,
usually by 4:30 p.m. Eastern time. Shares may be purchased on any day
that the New York Stock Exchange and the Federal Reserve are open for
business. Shares, however, cannot be purchased by Federal Reserve wire on
days when either the New York Stock Exchange or the Federal Reserve 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 Fund at
1-888-889-0799.
11
<PAGE>
UNDERSTANDING EARNINGS AND TAXES
DECLARING AND PAYING DIVIDENDS -- Dividends are declared each day the NAV
is calculated. Dividends are normally paid on the last business day of
each month. Net capital gain, if any, will be paid once a year.
WHEN DO DIVIDENDS ACCRUE? -- Your dividends begin to accrue on the day of
purchase for shares bought before 4:30 p.m. Eastern time. They begin to
accrue on the following day for shares purchased after 4:30 p.m. Eastern
time. You will not be credited with dividends for shares on the day you
sell them.
DISTRIBUTION OPTIONS -- Your dividends will be automatically reinvested
in additional full or fractional shares, unless you instruct the Fund in
writing prior to the date of distribution of your election to receive
payment in cash. Your election will be effective for all dividends and
distributions paid after the Fund receives your written notice. To cancel
your election, please send the Fund another written notice. Proceeds from
distributions will normally be wired to your financial institution on the
business day after distributions are credited to your account.
TAX CONSIDERATIONS -- The Fund intends to distribute substantially all of
its net investment income (including net short-term capital gain) to
shareholders. If, at the close of each quarter of its taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
the interest on which is excludable from gross income for federal income
tax purposes, the Fund may pay "exempt-interest dividends" to its
shareholders. Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes, but may have
certain collateral federal tax consequences including alternative minimum
tax consequences.
You will be notified at least annually about the tax consequences of
distributions made each year. BE SURE TO CONSULT YOUR TAX ADVISOR ABOUT
THE
12
<PAGE>
SPECIFIC TAX IMPLICATIONS OF YOUR INVESTMENTS. FOR ADDITIONAL INFORMATION
REGARDING TAX CONSIDERATIONS, SEE THE SAI.
BACKUP WITHHOLDING -- You must provide your financial institution with
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%.
13
<PAGE>
HOW TO BUY AND SELL SHARES
Here are the details you should know about buying and selling shares:
HOW TO PLACE AN ORDER
You may place an order with:
- an approved broker-dealer; or
- any other approved financial institution.
ORDERING THROUGH A BROKER-DEALER OR FINANCIAL INSTITUTION -- You may
purchase shares through accounts with brokers and other financial
institutions that are authorized to place trades in Fund shares for their
customers. If you invest through an authorized institution, you will have
to follow its procedures, which may be different from the procedures for
investing directly. Your financial institution may charge a fee for its
services, in addition to the fees charged by the Fund. You will also
generally have to address your correspondence or questions regarding the
Fund to your financial institution.
WHEN ORDERS WILL BE COMPLETED -- You may have to transmit purchase or
exchange requests to your financial institution at an earlier time for
your transaction to become effective that day. This allows the financial
institution time to process your request and transmit it to the Fund. For
more information about how to purchase or exchange fund shares through
your financial institution, you should contact your financial institution
directly.
If we receive your purchase order, through your financial institution,
before 4:30 p.m. Eastern time, the order will be executed that same day.
Orders received after 4:30 p.m. Eastern time will be executed the
following business day. Your shares will be bought, only after we receive
a properly completed order with full payment.
14
<PAGE>
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 -- If your account balance drops below $100,000
because of redemptions, the Fund may redeem your shares. However, the
Fund will always give you at least 30 days' written notice to give you
time to add to your account and avoid involuntary redemption of your
shares.
PAYMENT RESTRICTIONS -- We only accept payments by wire in U.S. funds.
Cash, checks and third-party checks will not be accepted. Consult with
your financial institution about their acceptable methods of payment.
WIRING FEE -- The financial institution placing your order may charge its
own wiring fees.
BUYING SHARES
FIRST TIME AND SUBSEQUENT PURCHASES -- You will have to follow your
financial institution's procedures for transacting with the Fund. Contact
your financial institution for more information.
SELLING SHARES
GENERAL INFORMATION -- You may sell your shares by contacting your
broker-dealer or financial institution. You will have to follow their
procedures. Contact your broker-dealer or financial institution for more
information.
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's Fedline System is closed or restricted.
We reserve the right to reject any order that is not received in proper
form. For example, if we are
15
<PAGE>
unable to determine how many shares you wish to sell, we may not execute
your order.
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. In
unusual circumstances, the Fund may temporarily suspend the processing of
sell requests, or postpone payments of proceeds for up to five business
days, as permitted by federal securities laws. Please see the SAI for a
more detailed discussion.
CONFIRMING AUTHENTICITY -- We will make every effort to verify that an
order is authentic. To do so, we may:
- ask for a form of personal identification or written
confirmation of instructions; and
- tape record your telephone instructions.
We reserve the right to refuse an order if we cannot reasonably confirm
the authenticity of the instructions.
LIABILITY -- We 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>
IMPORTANT TERMS TO KNOW
KEY DEFINITIONS
"We", "Us" and "Our" means the CNI Charter Government Fund.
"You" and "Your" means the prospective investor or current shareholder.
"Liquidity" means the ability to turn investments into cash.
"Quality" means the credit rating given to a security by a nationally
recognized statistical 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
CNI CHARTER GOVERNMENT 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
investments is available in the Fund's Annual and Semi-Annual Reports to
shareholders. In the Fund's Annual Report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year. To receive a free copy of this
Prospectus, the SAI, or the Annual or Semi-Annual Reports (when available),
please contact:
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
1-888-889-0799
INFORMATION ABOUT THE FUND MAY BE REVIEWED AND COPIED:
- - at the SEC's Public Reference Room in Washington, D.C. at 1-800-SEC-0330;
- - on the SEC's Internet site at www.sec.gov; or
- - by written request (including duplication fee) to the Public Reference
Section of the SEC, Washington, D.C. 20549-6009.
FOR THE CURRENT SEVEN-DAY YIELD, OR IF YOU HAVE QUESTIONS ABOUT THE FUND, PLEASE
CALL 1-888-889-0799.
The Fund's Investment Company Act
file number: 811-07923.
[LOGO]
GOVERNMENT FUND
CLASS A
PROSPECTUS
DATED MAY 1, 1999
CNI-F-005-01
<PAGE>
Rule 497(e)
File Nos. 333-16093 and 811-07923
STATEMENT OF ADDITIONAL INFORMATION
CNI CHARTER FUNDS
400 North Roxbury Drive, Beverly Hills, California 90210
CNI CHARTER GOVERNMENT FUND
CNI CHARTER CALIFORNIA TAX EXEMPT FUND
May 1, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with each Prospectus dated April 30, 1999, which may be
amended from time to time, for the CNI Charter Government Fund (the
"Government Fund") and the CNI Charter California Tax Exempt Fund (the
"California Tax Exempt Fund", and together with the Government Fund, the
"Funds"). The Funds are diversified investment portfolios of the CNI Charter
Funds (the "Trust"), an open-end, management investment company. The Trust
was formerly called the Berkeley Funds. The Government Fund was formerly
called the Berkeley Government Fund. The California Tax Exempt Fund was
formerly called the Berkeley California Tax Exempt Fund.
To obtain a free copy of the above-referenced prospectuses, please contact
SEI Investments Fund Management (the "Transfer Agent") at 1-888-889-0799.
<PAGE>
TABLE OF CONTENTS
Investment Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management of the Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Portfolio Transactions and Turnover. . . . . . . . . . . . . . . . . . . . . 23
Distributions and Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Share Price Calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Distribution Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Shareholder Service Agreements . . . . . . . . . . . . . . . . . . . . . . . 29
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Purchase and Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . 31
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix- Ratings of Investment Securities . . . . . . . . . . . . . . Appendix
ii
<PAGE>
INVESTMENT TECHNIQUES
CALIFORNIA TAX EXEMPT FUND
The Fund's investment objective is to preserve principal value and maintain a
high degree of liquidity while providing current income exempt from federal
and, to the extent possible, California state personal income taxes. Also,
the Fund seeks to maintain a $1.00 per share net asset value. There can be
no assurance that the Fund will achieve its investment objectives.
It is a fundamental policy of the Fund to invest, under normal conditions, at
least 80% of its net assets in municipal securities that produce interest
that, in the opinion of bond counsel, is exempt from federal income tax, and
the Fund will invest, under normal conditions, at least 80% of its net assets
in securities the interest on which is not a preference item for purposes of
the federal alternative minimum tax (the "AMT"). Under normal conditions, at
least 65% of the Fund's assets will be invested in municipal obligations the
interest on which is exempt from California state personal income tax. These
constitute municipal obligations of the State of California and its political
subdivisions of municipal authorities and municipal obligations issued by
territories or possessions of the United States. The Fund may invest, under
normal conditions, up to 20% of its net assets in (1) municipal securities
the interest on which is a preference item for purposes of the AMT (although
the Fund has no present intention of investing in such securities); and (2)
taxable investments.
The Investment Manager or Sub-adviser will not invest 25% or more of the
Fund's assets in municipal securities the interest on which is derived from
revenues of similar type projects. This restriction does not apply to
municipal securities in any of the following categories: public housing
authorities; general obligations of states and localities; state and local
housing finance authorities or municipal utilities systems.
There can be no assurance that the Fund will be able to achieve its
investment objective, or that the Fund will be able to maintain a constant
$1.00 net asset value per share.
GOVERNMENT FUND
The Fund's investment objective is to preserve principal value and maintain a
high degree of liquidity. Also, the Fund seeks to maintain a $1.00 per share
net asset value. There can be no assurance that the Fund will achieve its
investment objectives.
It is a fundamental policy of the Fund to invest, under normal conditions, in
(1) U.S. Treasury Obligations; (2) Obligations issued or guaranteed as to
principal and interest by the agencies or instrumentalities of the U.S.
Government; and (3) Repurchase agreements involving these obligations.
There can be no assurance that the Fund will be able to achieve its
investment objective, or that the Fund will be able to maintain a constant
$1.00 net asset value per share.
PERMITTED INVESTMENTS
BANK NOTES. The Funds may invest in bank notes, which are unsecured
promissory notes representing debt obligations that are issued by banks in
large denominations.
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BANKERS' ACCEPTANCES. The Funds may invest in Bankers' acceptances.
Bankers' acceptances are bills of exchange or time drafts drawn on and
accepted by a commercial bank. Bankers' acceptances are issued by
corporations to finance the shipment and storage of goods. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT. The Funds may invest in certificates of deposit.
Certificates of deposit is an interest-bearing instrument with a specific
maturity. They are issued by banks and savings and loan institutions in
exchange for the deposit of funds and normally can be traded in the secondary
market prior to maturity. Certificates of deposit with penalties for early
withdrawal will be considered illiquid.
COMMERCIAL PAPER. The Funds 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 Funds 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, or Sub-advisers,
pursuant to guidelines approved by the Trust's Board of Trustees, will
monitor the Funds' investments in these securities, focusing on such
important factors as, among others, valuation, liquidity, and availability of
information.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. The Government
Fund may invest in 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.
FIXED INCOME SECURITIES. The Funds may invest in fixed income securities.
Fixed income securities are debt obligations issued by corporations,
municipalities and other borrowers. The market value of the Funds' fixed
income investments will change in response to interest rate changes and other
factors. During periods of falling interest rates, the values of outstanding
fixed income securities generally rise. Conversely, during periods of rising
interest rates, the values of
2
<PAGE>
such securities generally decline. Changes by recognized rating agencies in
the rating of any fixed income security and in the ability of an issuer to
make payments of interest and principal also affect the value of these
investments. Changes in the value of portfolio securities will not
necessarily affect cash income derived from these securities, but will affect
the Funds' net asset value.
FUTURES AND OPTIONS ON FUTURES. The Funds may engage in futures and options
on futures. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. An option on a futures
contract gives the purchaser the right, in exchange for a premium, to assume
a position in a futures contract at a specified exercise price during the
term of the option. The Funds may use futures contracts and related options
for bona fide hedging purposes, to offset changes in the value of securities
held or expected to be acquired or be disposed of, to minimize fluctuations
in foreign currencies, or to gain exposure to a particular market or
instrument. The Funds will minimize the risk that it will be unable to close
out a futures contract by only entering into futures contracts that are
traded on national futures exchanges.
An index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the bond index value at
the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the bonds comprising
the index is made: generally contracts are closed out prior to the expiration
date of the contract.
In order to avoid leveraging and related risks, when the Funds invest in
futures contracts, the Funds will cover positions by depositing an amount of
cash or liquid securities equal to the market value of the futures positions
held, less margin deposits, in a segregated account and that amount will be
marked-to-market on a daily basis.
The Funds may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), so long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do
not exceed 5% of the Funds' net assets.
There are risks associated with these activities, including the following:(1)
the success of a hedging strategy may depend on an ability to predict
movements in the prices of individual securities, fluctuations in markets and
movements in interest rates, (2) there may be an imperfect or no correlation
between the changes in market value of the securities held by the Funds and
the prices of futures and options on futures, (3) there may not be a liquid
secondary market for a futures contract or option, (4) trading restrictions
or limitations may be imposed by an exchange and (5) government regulations
may restrict trading in futures contracts and options on futures.
The Funds may buy and sell futures contracts and related options to manage
exposure to changing interest rates and securities prices. Some strategies
reduce the Funds' exposure to price fluctuations, while others tend to
increase market exposure. Futures and options on futures can be volatile
instruments and involve certain risks that could negatively impact the Funds'
return. No price is paid upon entering into futures contracts. Instead, the
Fund would be required to deposit an amount of cash or U.S. Treasury
securities known as "initial margin." Subsequent payments, called "variation
margin," to and from the broker, would be made on a daily basis as the value
of the future position varies (a process known as "market to market"). The
margin is in the nature of performance bond or good-faith deposit on a
futures contract.
3
<PAGE>
Futures and options on futures are taxable instruments. With respect to the
California Tax Exempt Fund, the Fund may not invest more than 20% of its net
asset value in these taxable instruments.
INVESTMENT COMPANY SHARES. The Funds may invest in shares of other
investment companies, to the extent permitted by applicable law and subject
to certain restrictions set forth in this Statement of Additional
Information. These investment companies typically incur fees that are
separate from those fees incurred directly by the Funds. The Funds' purchase
of such investment company securities results in the layering of expenses,
such that shareholders would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory fees, in
addition to paying Fund expenses. Under applicable regulations, the Funds
are prohibited from acquiring the securities of another investment company
if, as a result of such acquisition: (1) the Fund owns more than 3% of the
total voting stock of the other company; (2) securities issued by any one
investment company represent more than 5% of the Fund's total assets; or (3)
securities (other than treasury stock) issued by all investment companies
represent more than 10% of the total assets of the Fund.
MUNICIPAL SECURITIES. The California Tax Exempt Fund may invest in municipal
securities. Municipal securities consist of (1) debt obligations issued by
or on behalf of public authorities to obtain funds to be used for various
public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions
and facilities, and (2) certain private activity and industrial development
bonds issued by or on behalf of public authorities to obtain funds to provide
for the construction, equipment, repair or improvement of privately operated
facilities.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the venues of a project or
facility, tolls from a toll bridge, for example. Certificates of
participation represent an interest in an underlying obligation or commitment
such as an obligation issued in connection with a leasing arrangement. The
payment of principal and interest on private activity and industrial
development bonds generally is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
Municipal notes include general obligation notes, tax anticipation notes,
revenue anticipation notes, bond anticipation notes, certificates of
indebtedness, demand notes and construction loan notes and participation
interests in municipal notes. Municipal bonds include general obligation
bonds, revenue or special obligation bonds, private activity and industrial
development bonds and participation interests in municipal bonds.
MUNICIPAL LEASES. The California Tax Exempt Fund may invest in municipal
leases. The Fund may invest in instruments, or participations in
instruments, issued in connection with lease obligations or installment
purchase contract obligations of municipalities ("municipal lease
obligations"). Although municipal lease obligations do not constitute
general obligations of the issuing municipality, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate
funds for, and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses, which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose in the
relevant years. Municipal lease obligations are a relatively new form of
financing, and the market for such obligations is still developing. Municipal
leases will be treated as liquid only if they satisfy criteria set forth in
guidelines
4
<PAGE>
established by the Board of Trustees, and there can be no assurance that a
market will exist or continue to exist for any municipal lease obligation.
MUNICIPAL NOTES. The California Tax Exempt Fund may invest in municipal
notes. Municipal notes consist of general obligation notes, tax anticipation
notes (notes sold to finance working capital needs of the issuer in
anticipation of receiving taxes on a future date), revenue anticipation notes
(notes sold to provide needed cash prior receipt of expected non-tax revenues
from a specific source), bond anticipation notes, tax and revenue
anticipation notes, certificates of indebtedness, demand notes, and
construction loan notes. The maturities of the instruments at the time of
issue will generally range from three months to one year.
MUNICIPAL BONDS. The California Tax Exempt Fund may invest in municipal
bonds. Municipal bonds are debt obligations issued to obtain funds for
various public purposes. The Fund may purchase private activity or
industrial development bonds if the interest paid is exempt from federal
income tax. These bonds are issued by or on behalf of public authorities to
raise money to finance various privately-owned or -operated facilities for
business and manufacturing, housing, sports, and pollution control. These
bonds are also used to finance public facilities such as airports, mass
transit systems, ports, parking or sewage or solid waste disposal facilities,
as well as certain other categories. The payment of the principal and
interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreements.
Repurchase agreements are agreements under which securities are acquired from
a securities dealer or bank subject to resale on an agreed upon date and at
an agreed upon price which includes principal and interest. The Funds or
their agents will have actual or constructive possession of the securities
held as collateral for the repurchase agreement. The Funds bear a risk of
loss in the event the other party defaults on its obligations and the Funds
are delayed or prevented from exercising their right to dispose of the
collateral securities, or if the Funds realize a loss on the sale of the
collateral securities. The Investment Manager or Sub-advisers will enter
into repurchase agreements on behalf of a Fund only with financial
institutions deemed to present minimal risk of bankruptcy during the term of
the agreement based on guidelines established and periodically reviewed by
the Board of Trustees. These guidelines currently permit the Funds to enter
into repurchase agreements only with approved banks and primary securities
dealers, as recognized by the Federal Reserve Bank of New York, which have
minimum net capital of $100 million, or with a member bank of the Federal
Reserve System. Repurchase agreements are considered to be loans
collateralized by the underlying security. Repurchase agreements entered
into by the Funds will provide that the underlying security at all times
shall have a value at least equal to 102% of the price stated in the
agreement. This underlying security will be marked to market daily. The
Investment Manager or Sub-advisers will monitor compliance with this
requirement. Under all repurchase agreements entered into by the Funds, the
Custodian or its agent must take possession of the underlying collateral.
However, if the seller defaults, the Funds could realize a loss on the sale
of the underlying security to the extent the proceeds of the sale are less
than the resale price. In addition, even though the Bankruptcy Code provides
protection for most repurchase agreements, if the seller should be involved
in bankruptcy or insolvency proceedings, the Funds may incur delays and costs
in selling the security and may suffer a loss of principal and interest if
the Funds are treated as unsecured creditors. Repurchase agreements, in some
circumstances, may not be tax exempt.
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
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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 the 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 a Fund's inability to dispose of such
securities promptly or at favorable prices.
The Board of Trustees may, in the future, delegate the function of making
day-to-day determination of liquidity to a Fund's Investment Manager or
Sub-adviser pursuant to guidelines approved by the Board. The Investment
Manager or Sub-adviser will take into account a number of factors in reaching
liquidity decisions, including, but not limited to: (1) the frequency of
trades for the security, (2) the number of dealers that quote prices for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers, and (5) 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 or Sub-adviser, according to the guidelines
approved by the Board, determines a Rule 144A eligible security to be liquid,
such a security would not be subject to a Fund's percentage limit on illiquid
securities investment.
STANDBY COMMITMENTS AND PUT TRANSACTIONS. The California Tax Exempt Fund
reserves the right to engage in standby commitments and put transactions.
The Investment Manager and Sub-adviser have the authority to purchase
securities at a price which would result in a yield to maturity lower than
that generally offered by the seller at the time of purchase when the Fund
can simultaneously acquire the right to sell the securities back to the
seller, the issuer, or a third party (the "writer") at an agreed-upon price
at any time during a stated period or on a certain date. Such a right is
generally denoted as a "standby commitment" or a "put." The purpose of
engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions and remain as fully invested
as possible in municipal securities. The right to put the securities depends
on the writer's ability to pay for the securities at the time the put is
exercised. The Fund would limit its put transactions to institutions which
the Investment Manager or Sub-adviser believes present minimum credit risks,
and the Investment Manager or Sub-adviser would use its best efforts to
initially determine and continue to monitor the financial strength of the
sellers of the options by evaluating their financial statements and such
other information as is available in the marketplace. It may, however, be
difficult to monitor the financial strength of the writers because adequate
current financial information may not be available. In the event that any
writer is unable to honor a put for financial reasons, the Fund would be a
general creditor (i.e., on a parity with all other unsecured creditors) of
the writer. Furthermore, particular provisions of the contract between the
Fund and the writer may excuse the writer from repurchasing the securities;
for example, a change in the published rating of the underlying securities or
any similar event that has an adverse effect on the issuer's credit or a
provision in the contract that the put will not be exercised except in
certain special cases, for example, to maintain portfolio liquidity. The
Fund could, however, at any time sell the underlying portfolio security in
the open market or wait until the portfolio security matures, at which time
it should realize the full par value of the security.
The securities purchased subject to a put, may be sold to third persons at
any time, even though the put is outstanding, but the put itself, unless it
is an integral part of the security as originally issued, may not be
marketable or otherwise assignable. Therefore, the put would have value only
to the Fund. Sale of the securities to third parties or lapse of time with
the put unexercised may
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terminate the right to put the securities. Prior to the expiration of any
put option, the Fund could seek to negotiate terms for the extension of such
an option. If such a renewal cannot be negotiated on terms satisfactory to
the Fund, the Fund could, of course, sell the security. The maturity of the
underlying security will generally be different from that of the put.
TAX EXEMPT COMMERCIAL PAPER. The Funds may invest in tax exempt commercial
paper. Tax exempt commercial paper is unsecured short-term obligations
issued by a government or political sub-division. It is not currently
expected that the Funds will invest more than 5% of their net assets in tax
exempt commercial paper.
TIME DEPOSITS. The Funds may invest in time deposits. Time deposits are
non-negotiable receipts issued by a bank in exchange for the deposit of
funds. Like a certificate of deposit, a time deposit earns a specified rate
of interest over a definite period of time; however, it cannot be traded in
the secondary market. Time deposits with a withdrawal penalty are considered
to be illiquid securities.
U.S. GOVERNMENT AGENCY OBLIGATIONS. The Funds may invest in U.S. agency
obligations. Various agencies of the U.S. Government issue obligations,
including, the Export/Import Bank of the United States, Farmers Home
Administration, Federal Farm Credit Bank, Federal Housing Administration,
GNMA, Maritime Administration, Small Business Administration, and the
Tennessee Valley Authority. The Funds may purchase securities guaranteed by
GNMA which represent participation in Veterans Administration and Federal
Housing Administration backed mortgage pools. Obligations of
instrumentalities of the U.S. Government include securities issued by, among
others, Federal Home Loan Banks, HLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Fannie Mae and the U.S. Postal Service. Some of these
securities are supported by the full faith and credit of the U.S. Treasury
(i.e., GNMA), others are supported by the right of the issuer to borrow from
the Treasury. Guarantees of principal by agencies or instrumentalities of
the U.S. Government may be a guarantee of payment at the maturity of the
obligation so that in the event of a default prior to maturity there might
not be a market and thus no means of realizing the value of the obligation
prior to maturity.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may invest in variable and
floating rate instruments. Certain of the obligations purchased by the Funds
may carry variable or floating rates of interest and may involve a
conditional or unconditional demand feature. Such obligations may include
variable amount master demand notes. Such instruments bear interest at rates
which are not fixed, but which vary with changes in specified market rates or
indices. The interest rates on these securities may be reset daily, weekly,
quarterly or at some other interval, and may have a floor or ceiling on
interest rate changes. There is a risk that the current interest rate on
such obligations may not accurately reflect existing market interest rates.
A demand instrument with a demand notice period exceeding seven days may be
considered illiquid if there is no secondary market for such security.
WHEN-ISSUED SECURITIES. The Funds may invest in when-issued securities.
These securities involve the purchase of debt obligations on a when-issued
basis, in which case delivery and payment normally take place within 45 days
after the date of commitment to purchase. These securities are subject to
market fluctuation due to changes in market interest rates, and it is
possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed. Delivery of and payment for these securities may occur a month or
more after the date of the purchase commitment. Each Fund will maintain with
the custodian a separate account with liquid securities or cash in an amount
at least equal to these commitments. The interest rate realized on these
securities is fixed as of the
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purchase date, and no interest accrues to the Fund before settlement.
Although the Funds generally purchase securities on a when-issued or forward
commitment basis with the intention of actually acquiring securities for
their portfolios, the Funds may dispose of a when-issued security or forward
commitment prior to settlement if the Investment Manager or Sub-adviser deems
it appropriate to do so.
The Funds will only make commitments to purchase obligations on a when-issued
basis with the intention of actually acquiring the securities, but may sell
them before the settlement date. The when-issued securities are subject to
market fluctuation, and no interest accrues to the purchaser during this
period. The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the purchaser enters into the
commitment. Purchasing obligations on a when-issued basis is a form of
leveraging and can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in
the transaction itself. In that case there could be an unrealized loss at
the time of delivery.
BORROWING POLICY. The Funds 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 total assets in order to meet redemption
requests without immediately selling any portfolio securities. The Funds
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 a 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.
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, [THE "1940 ACT"]) OF THE FUNDS. THE FUNDS
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 a 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.
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(4) Enter into repurchase agreements if, as a result thereof, more than
10% of 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 Funds will invest no more than 10%
of 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 a
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. A Fund will not borrow
for leverage purposes or purchase securities or make investments while
borrowings are outstanding. Any borrowings by a Fund will not be
collateralized. If for any reason the current value of the total
assets of a Fund falls below an 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.
(15) Invest in interests or leases in oil, gas or other mineral
exploration or development programs.
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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 Funds will only purchase securities that the Investment Manager or
Sub-advisers have determined, according to procedures approved by the Board
and factors set forth in Rule 2a-7 under the 1940 Act, 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;
(3) 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 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.
Each 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
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collateralized by non-Government securities will be First Tier Securities at
the time the repurchase agreements are executed.
RISK CONSIDERATIONS
GENERAL RISKS TO CONSIDER
The Funds' portfolios 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 Funds. The market value of the obligations in the
Funds' portfolios can be expected to vary inversely to changes in prevailing
interest rates. Investors also should recognize that, in periods of declining
interest rates, the Funds' yields will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates, the Funds'
yield will tend to be somewhat lower. Also, when interest rates are falling,
the inflow of net new money to the Funds from the continuous sale of their
shares will likely be invested in portfolio instruments producing lower
yields than the balance of the portfolios, thereby reducing the Funds'
current yields. In periods of rising interest rates, the opposite can be
expected to occur. In addition, securities in which the Funds 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 Funds' portfolios
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 Funds will invest in
securities which the Investment Manager or Sub-adviser has determined,
according to procedures approved by the Board, and factors set forth under
Rule 2a-7 under the Investment Company Act of 1940, 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 or Sub-adviser to
minimize the credit risk with respect to the securities in the Funds'
portfolios, 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 Funds' portfolios, the
Funds may be unable to maintain stable net asset values of $1.00 per share.
The Funds' 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.
CALIFORNIA TAX EXEMPT FUND -- SPECIFIC RISKS
The ability of issuers to pay interest on, and repay principal of, California
municipal securities ("California Municipal Securities") may be affected by
(1) amendments to the California Constitution and related statutes that limit
the taxing and spending authority of California government entities, and
related civil actions, (2) a wide variety of California laws and regulations,
and (3) the general financial condition of the State of California.
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There could be economic, business or political developments which might
affect all Municipal Securities of a similar type. To the extent that a
significant portion of the Fund's assets are invested in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the
risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so invested. Moreover, in seeking to attain its
investment objective the Fund may invest all or any part of its assets in
Municipal Securities that are industrial development bonds.
Under normal conditions, the Fund will be fully invested in obligations which
produce income exempt from federal income tax and California state personal
income tax. Accordingly, the Fund will have considerable investments in
California Municipal Securities. As a result, the Fund will be more
susceptible to factors which adversely affect issuers of California
obligations than a mutual fund which does not have as great a concentration
in California municipal obligations.
An investment in the California Tax Exempt Fund will be affected by the many
factors that affect the financial condition of the State of California. For
example, financial difficulties of the State of California, its counties,
municipalities and school districts that hinder efforts to borrow and credit
ratings are factors which may affect the Fund.
The Fund's concentration in California municipal bonds may expose
shareholders to additional risks. In particular, the Fund will be vulnerable
to any development in California's economy that may weaken or jeopardize the
ability of California municipal-bond issuers to pay interest and principal on
their bonds. Although the Fund's objective is to provide income exempt from
federal and California State personal income taxes, some of its income may be
subject to the alternative minimum tax.
HISTORICAL PERSPECTIVE. The information set forth below is a general summary
intended to give a recent historical description. It is not a discussion of
any specific factors that may affect any particular issuer of California
Municipal Securities. The information is not intended to indicate continuing
or future trends in the condition, financial or otherwise, of the State of
California. Such information is derived from official statements utilized in
connection with securities offerings of the State of California that have
come to the attention of the Trust and were available prior to the date of
this Statement of Additional Information. Such information has not been
independently verified by the California Tax Exempt Fund.
Because the California Tax Exempt Fund expects to invest substantially all of
its assets in California Municipal Securities, it will be susceptible to a
number of complex factors affecting the issuers of California Municipal
Securities, including national and local political, economic, social,
environmental and regulatory policies and conditions. The Fund cannot
predict whether or to what extent such factors or other factors may affect
the issuers of California Municipal Securities, the market value or
marketability of such securities or the ability of the respective issuers of
such securities acquired by the Fund to pay interest on, or principal of,
such securities. The creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and there is no responsibility on the part
of the State of California to make payments on such local obligations. There
may be specific factors that are applicable in connection with investment in
the obligations of particular issuers located within California, and it is
possible the Fund will invest in obligations of particular issuers as to
which such specific factors are applicable.
From mid-1990 to late 1993, California suffered the most severe recession in
the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, have been
severely affected. Since the start of 1994, however,
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California's economy has been on a steady recovery. The rate of economic
growth in California in 1997, in terms of job gains, exceeded that of the
rest of the United States. The State added nearly 430,000 non-farm jobs
during 1997. In 1996 California surpassed its pre-recession employment peak
of 12.7 million jobs. The unemployment rate, while still higher than the
national average, fell to 5.9% in early 1998, compared to over 10 percent
during the recession. Many of the new jobs were created in such industries
as computer services, software design, motion pictures and high technology
manufacturing. Business services, export trade and other manufacturing also
experienced growth. All major economic regions of the State grew. The rate
of employment growth for the Los Angeles region indicates that its growth has
almost caught up with that in the San Francisco bay region on a population
share basis. The unsettled financial situation occurring in certain Asian
economies may adversely affect the State's export-related industries and,
therefore, the State's rate of economic growth.
The recession severely affected State revenues while the State's health and
welfare costs were increasing. Consequently, the State had a lengthy period
of budget imbalance; the State's accumulated budget deficit approached $2.8
billion at its peak at June 30, 1993. A consequence of the large budget
deficits has been that the State depleted its available cash resources and
had to use a series of external borrowings to meet its cash needs. With the
end of the recession, the State's financial condition has improved in the
1995-96, 1996-97 and 1997-98 fiscal years, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and
continued spending restraint. As of June 30, 1997, the State's budget
reserve had a positive cash balance of $461 million. No deficit borrowing
has occurred at the end of the last three fiscal years and the State's cash
flow borrowing was limited to $3 billion in 1997-98.
In each of these the 1995-96 and 1996-97 fiscal years, the State budget
contained the following major features:
1. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98;
2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for greater
support from the federal government. The State also attempted to shift
to the federal government a larger share of the cost of incarceration
and social services for illegal immigrants. Federal support never
reached the levels anticipated when the budgets were enacted. These
funding shortfalls were filled, however, by revenue collections which
exceeded expectations;
3. General Fund support for the University of California and California
State Universities grew by an average of 5.2 percent and 3.3 percent
per year, respectively, and there were no increases in student fees;
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were
approved for construction, however;
5. There were no tax increases and, starting January 1, 1997, there was
a 5 percent cut in corporate taxes. The suspension of the Renters Tax
Credit was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96 and $1.6 billion in
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1996-97) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid. The accumulated budget deficit from the recession years was
finally eliminated.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget
Act anticipates General Fund revenues and transfers of $52.5 billion (a 6.8
percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels). On a budgetary
basis, the budget reserve (SFEU) is projected to decrease from $408 million
at June 30, 1997, to $112 million at June 30, 1998. The Budget Act also
includes Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of expenditures
from various Bond Funds. Following enactment of the Budget Act, the State
implemented its annual cash flow borrowing program, issuing $3 billion of
notes which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large increase
in funding for K-14 education, reflecting strong revenues which have
exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending is allocated to prior fiscal years;
2. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension contribution to the
quarterly basis existing prior to the deferral actions invalidated by
the courts;
3. Continuing the third year of a four-year "compact" which the State
Administration has made with higher education units, funding from the
General Fund for the University of California and California State
University has increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees;
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels;
5. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of
the new CalWORKs welfare reform program;
6. Unlike prior years, this Budget Act does not depend on uncertain
federal budget actions. About $300 million in federal funds, already
included in the federal FY 1997 and 1998 budgets, are included in the
Budget Act, to offset incarceration costs for illegal immigrants;
7. The Budget Act contains no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately
$500 million.
After enactment of the Budget Act, and prior to the end of the Legislative
Session on September 13, 1997, the Legislature and the Governor reached
certain agreements related to State expenditures and taxes. The Legislature
passed a bill restoring $203 million of education-related expenditures which
the Governor had vetoed in the original Budget Act, based on agreement with
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the Governor on an education testing program. The Legislature also passed a
bill to restore $48 million of welfare cost savings which had been part of
earlier legislation vetoed by the Governor. The Legislature also passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the legislation
signed by the Governor are a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the year,
and reform of funding for county trial courts, with the State to assume
greater financial responsibility.
The May 1998 Revision to the Governor's proposed budget increases the General
Fund revenue forecast by nearly $1.8 billion in 1997-98 and $2.5 billion in
1998-99. The May Revision provides for a balanced budget and a budget
reserve for economic uncertainties of $1.6 billion. In the May Revision the
administration proposed, among other things, a two-step reduction in the
State's vehicle license fee (VLF) which, when fully phased in, would reduce
State revenues by more than $3 billion annually. Since VLF is a primary
source of revenue for local governments, the May Revision proposed continuous
appropriation from the General Fund to replace that loss in revenues.
The VLF proposal met significant opposition in the Legislature and continuing
disagreement over the nature and extent of the proposed tax cut delayed final
adoption of the 1998-99 budget. Local government concern about the potential
impact of the VLF proposal on local government revenues underscores the
extent to which California county and other local government budgets are
affected by State budget decisions beyond their control.
The Governor signed the 1998-99 Budget Act on August 21, 1998. The 1998-99
Budget Act is based on projected General Fund revenues and transfers of $57.0
billion (after giving effect to various tax reductions enacted in 1997 and
1998), a 4.2% increase from the revised 1997-98 figures. Special Fund
revenues were estimated at $14.3 billion. The revenue projections were based
on the Governor's May Revision to the 1998-99 Budget and may be overstated in
light of the possible effect on California's economic growth of worsening
economic problems in various international markets.
The Budget Act provides authority for expenditures of $57.3 billion from the
General Fund (a 7.3% increase from 1997-98), $14.7 billion from Special
Funds, and $3.4 billion from bond funds. The Budget Act projects a balance
in the SFEU at June 30, 1999 of $1.255 billion, a little more than 2% of
General Fund revenues. The Budget At assumes the State will carry out its
normal inta-year cash glow borrowing in the amount of $1.7 billion.
YEAR 2000. In October 1997 the Governor issued Executive Order W-163-97
stating that Year 2000 solutions would be a State priority and requiring each
agency of the State, no later than December 31, 1998, to address Year 2000
problems in their essential systems and protect those systems from corruption
by non-compliant systems, in accordance with the Department of Information
Technology's California 2000 Program. There can be no assurance that steps
being taken by state or local government agencies with respect to the Year
2000 problem will be sufficient to avoid any adverse impact upon the budgets
or operations of those agencies or upon the Trust.
Because of the deterioration in the State's budget and cash situation, the
State's credit ratings have been reduced. Since late 1991, all three major
nationally recognized statistical rating organizations have lowered their
ratings for general obligation bonds of the State from the highest ranking of
"AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Services,
Inc. However, prior to the October 8, 1997, sale of $1 billion in general
obligation bonds, Fitch raised
15
<PAGE>
California's general obligation bond rating from "A+" to "AA-", however S&P
and Moody's did not follow suit, confirming those ratings at "A+" and "A1",
respectively. It is not presently possible to determine whether, or the
extent to which, Moody's, S&P or Fitch will change such ratings in the
future. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State, and there is no obligation on the part of
the State to make payment on such local obligations in the event of default.
CONSTITUTIONAL AND STATUTORY LIMITATIONS. Article XIII A of the California
Constitution (which resulted from the voter approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property
value caused by substantial damage, destruction or other factors, or when
there is a "change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been unsuccessful.
In 1992, the United States Supreme Court ruled that notwithstanding the
disparate property tax burdens that Proposition 13 might place on otherwise
comparable properties, those provisions of Proposition 13 do not violate the
Equal Protection Clause of the United States Constitution. In response to
the significant reduction in local property tax revenue caused by the passage
of Proposition 13, the State enacted legislation to provide local governments
with increased expenditures from the General Fund. This fiscal relief has
ended.
Article XIII B of the California Constitution generally limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of
taxes" of the State and/or local government exceed its appropriations limit,
the excess revenues must be rebated. Certain expenditures, including debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld the Proposition 62 requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This
recent decision may invalidate other taxes that have been imposed by local
governments in California and make it more difficult for local governments to
raise taxes. In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives
changed the State's appropriations limit under Article XIII B to (1) require
that the State set aside a prudent reserve fund for public education, and (2)
guarantee a minimum level of State funding for public elementary and
secondary schools and community colleges.
In November 1996, California voters approved Proposition 218. The initiative
applied the provisions of Proposition 62 to all entities, including charter
cities. It requires that all taxes for
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<PAGE>
general purposes obtain a simple majority popular vote and that taxes for
special purposes obtain a two-thirds majority vote. Prior to the
effectiveness of Proposition 218, charter cities could levy certain taxes
such as transient occupancy taxes and utility user's taxes without a popular
vote. Proposition 218 will also limit the authority of local governments to
impose property-related assessments, fees and charges, requiring that such
assessments be limited to the special benefit conferred and prohibiting their
use for general governmental services. Proposition 218 also allows voters to
use their initiative power to reduce or repeal previously authorized taxes,
assessments, fees and charges.
The effect of constitutional and statutory changes and of budget developments
on the ability of California issuers to pay interest and principal on their
obligations remains unclear, and may depend on whether a particular bond is a
general obligation or limited obligation bond (limited obligation bonds being
generally less affected). There is no assurance that any California issuer
will make full or timely payments of principal or interest or remain solvent.
For example, in December 1994, Orange County filed for bankruptcy.
Certain tax-exempt securities in which a Fund may invest may be obligations
payable solely from the revenues of specific institutions, or may be secured
by specific properties, which are subject to provisions of California law
that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a
mortgage or deed of trust on real property.
In addition, it is impossible to predict the time, magnitude, or location of
a major earthquake or its effect on the California economy. In January 1994,
a major earthquake struck the Los Angeles area, causing significant damage in
a four-county area. The possibility exists that another such earthquake
could create a major dislocation of the California economy.
The California Tax Exempt Fund's concentration in California Municipal
Securities provides a greater level of risk than a fund that is diversified
across numerous states and municipal entities.
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 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION PRINCIPAL OCCUPATION FOR THE
WITH THE PAST FIVE YEARS
TRUST
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Irwin G. Barnet, Esq. 61 Trustee An attorney and a principal of
Sanders, Barnet, Goldman, Simons Sanders, Barnet, Goldman, Simons
& Mosk & Mosk, a law firm.
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Maria D. Hummer, Esq.* 54 Trustee An attorney with Manatt, Phelps &
Manatt, Phelps & Phillips, LLP Phillips and Chair of the Land Use
11355 West Olympic Boulevard Section of that law firm.
Los Angeles, California 90064
Victor Meschures, CPA 61 Trustee A Certified Public Accountant with
Meschures, Campeas, Thompson & Meschures, Campeas, Thompson
Snyder, LLP & Snyder, LLP, an accounting firm
760 North La Cienega Boulevard
Los Angeles, California 90069
William R. Sweet 61 Trustee Retired; formerly, Executive Vice
81 Tiburon Road President, The Bank of California
Tiburon, California 94920 (1985-1996)
James R. Wolford 45 Trustee Senior Vice President and Chief
Bixby Ranch Company Financial Officer, Bixby Ranch
3010 Old Ranch Parkway, Suite 100 Company, an owner, operator and
Seal Beach, California 90740 developer of real estate.
Mark Nagle 39 President President, Vice President and
400 North Roxbury Drive and Chief Controller, Funds Accounting;
Beverly Hills, California 90210 Executive Vice President of the
Officer Administrator and Distributor
(1996 -- Present); BiSYS Fund
Services, Vice President of Fund
Accounting (1995-1996); Fidelity
Investments, Senior Vice President
(1981-1995).
Kathy Heilig 38 Controller Vice President and Assistant
400 North Roxbury Drive and Chief Secretary-Treasurer of SEI
Beverly Hills, California 90210 Accounting Investments (1997-Present);
Officer Assistant Controller of SEI
Investments Company (1995-
19997; Vice President of SEI
Investments Company (1991-
1995).
Joseph M. O'Donnell, Esq. 44 Vice Vice President and Assistant
400 North Roxbury Drive President Secretary of the Administrator and
Beverly Hills, California 90210 and Assistant the Distributor (1998-Present);
Secretary Vice President and General
Counsel, FPS Services, Inc. (1993-
1997).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Lydia A. Gavalis, Esq. 34 Vice Vice President and Assistant
400 North Roxbury Drive President Secretary of the Administrator and
Beverly Hills, California 90210 and Assistant the Distributor (1998-Present);
Secretary Assistant General Counsel and
Director of Arbitration,
Philadelphia Stock Exchange
(1989-1998)
Lynda J. Striegel, Esq. 50 Vice Vice President and Assistant
400 North Roxbury Drive President Secretary of the Administrator and
Beverly Hills, California 90210 and Assistant Distributor (1998-Present); Senior
Secretary Asset Management Counsel,
Barnett Banks, Inc. (1997-1998);
Partner, Groom and Nordberg,
Chartered (1996-1997); Associate
General Counsel, Riggs Bank,
N.A. (1991-1995).
James R. Foggo, Esq. 34 Vice Vice President and Assistant
400 North Roxbury Drive President Secretary of the Administrator and
Beverly Hills, California 90210 and Assistant Distributor (1998-Present);
Secretary Associate, Paul Weiss, Rifkind,
Wharton & Garrison (1998);
Associate, Baker & McKenzie
(1995-1998); Associate, Battle
Fowler LLP (1993-1995).
</TABLE>
*This individual is considered an interested person of the Trust as defined
in Section 2(a)(19) of the 1940 Act.
The address of each individual listed above, unless otherwise indicated, is
400 North Roxbury Drive, Beverly Hills, California 90210.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION REGISTRANT AND FUND
NAME, POSITION FROM REGISTRANT COMPLEX PAID TO DIRECTORS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Irwin G. Barnet $4,000 $4,000
Trustee
Maria D. Hummer $4,000 $4,000
Trustee
Victor Meschures $4,000 $4,000
Trustee
William R. Sweet $4,000 $4,000
Trustee
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
James R. Wolford $4,000 $4,000
Trustee
</TABLE>
---------------------
(1) Estimated for current fiscal year.
INVESTMENT MANAGER
The Trust and City National Bank ("Investment Manager") have entered into an
Investment Management Agreement (the "Management Agreement") as of
__________, 1999. 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 Funds and the Trust. The
Investment Manager is exempt from registering as an investment adviser under
the Investment Advisers Act of 1940, because of its status as a bank. City
National Bank, founded in the early 1950's, is a federally chartered
commercial bank with approximately $6.4 billion in assets as of December 31,
1998. It is a wholly-owned subsidiary of City National Corporation ("CNC"),
a New York Stock Exchange listed company.
The Management Agreement provides that the Investment Manager shall not be
liable for any error of judgement or mistake of law or for any loss suffered
by the Trust in connection with the matters to which the Management Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Manager in the performance of its
duties or from reckless disregard of its duties and obligations thereunder.
The continuance of the Management Agreement with respect to the Funds must be
specifically approved at least annually (1) by the vote of a majority of the
Trustees or by the vote of a majority of the outstanding voting securities of
each Fund, and (2) by the vote of a majority of the Trustees of the Trust who
are not parties to the Management Agreement or an "interested person" (as
that term is defined in the 1940 Act) of any party thereto, cast in person at
a meeting called for the purpose of voting on such approval. The Management
Agreement is terminable, without penalty, at any time as to any Fund by the
Trustees of the Trust, by a vote of a majority of the outstanding shares of
that Fund or by the Investment Manager on not less than 30 days' nor more
than 60 days' written notice. This Management Agreement shall not be
assignable by either party without the written consent of the other party.
The Investment Manager provides the Funds with investment management
services, including the selection, appointment, and supervision of the
Sub-adviser to each Fund. The Investment Manager may, in the future, and
after having secured the necessary SEC approval, change the Sub-adviser to
each Fund according to certain procedures without soliciting shareholders'
approval.
The Investment Manager is obligated under the Management Agreement to pay the
excess of the Funds' operating expenses as disclosed in the applicable
Prospectus. If operating expenses of any Fund exceed limitations established
by certain states, the Investment Manager will pay such excess. The
Investment Manager will not be required to bear expenses of any Fund to an
extent which would result in the Funds' inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code. The term
"expenses" is defined in such laws or regulations, and generally excludes
brokerage commissions, distribution expenses, taxes, interest and
extraordinary expenses.
20
<PAGE>
SUB-ADVISER TO THE GOVERNMENT FUND
The Trust and Wellington Management Company, LLP (the "Sub-adviser" or
"Wellington Management") have entered into a sub-advisory agreement (the
"Sub-advisory Agreement"). Wellington Management serves as investment
adviser to the Government Fund. The Sub-advisory Agreement provides that the
Sub-adviser shall not be protected against any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from the reckless disregard
of its obligations or duties thereunder.
The continuance of the Sub-advisory Agreement with respect to the Government
Fund after the first two (2) years of the Sub-advisory Agreement must be
specifically approved at least annually (1) by the vote of a majority of the
outstanding shares of the Government Fund or by the Trustees, and (2) by the
vote of a majority of the Trustees who are not parties to the Sub-advisory
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The Sub-advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, with
respect to the Government Fund, by a majority of the outstanding shares of
the Government Fund, on not less than 30 days' nor more than 60 days' written
notice to the Sub-adviser, or by the Sub-adviser on 90 days' written notice
to the Trust.
The Sub-adviser is entitled to a fee for its investment advisory services,
which is accrued daily and paid monthly at the following annual rates: .075%
of the combined daily net assets of the Government Fund up to $500 million
and .02% of such net assets in excess of $500 million. Wellington Management
may voluntarily waive portions of its fees, although such waiver is not
expected to affect the Government Fund's total operating expenses, due to the
nature of the Investment Manager's fee waivers. Wellington Management may
terminate its waiver at any time.
Wellington Management is located at 75 State Street, Boston, Massachusetts
02109. Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. As of March 31, 1999, Wellington
Management had discretionary management authority with respect to
approximately $215 billion in assets.
SUB-ADVISER TO THE CALIFORNIA TAX EXEMPT FUND
The Trust and Weiss, Peck & Greer, L.L.C. (the "Sub-adviser" or "WP&G") have
entered into a Sub-advisory agreement (the "Sub-advisory Agreement"). The
Sub-advisory Agreement provides that each Investment Manager or Sub-adviser
shall not be protected against any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith or gross negligence on its part
in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
WP&G serves as an investment adviser to the California Tax Exempt Fund. WP&G
invests the assets of the California Tax Exempt Fund, and continuously
reviews, supervises and administers the investment program of the California
Tax Exempt Fund. WP&G is a limited liability company founded as a limited
partnership in 1970, and engages in investment management, venture capital
management and management buyouts. WP&G has been active since its founding
in managing portfolios of tax exempt securities. As of March 31, 1999, total
assets under
21
<PAGE>
management were approximately $15.6 billion. The principal
business address of WP&G is One New York Plaza, New York, New York 10004.
The continuance of the Sub-advisory Agreement after the first two (2) years
must be specifically approved at least annually (1) by the vote of a majority
of the outstanding shares of the California Tax Exempt Fund or by the
Trustees, and (2) by the vote of a majority of the Trustees who are not
parties to such Sub-advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Sub-advisory Agreement will terminate automatically in the
event of its assignment, and is terminable at any time without penalty by the
Trustees of the Trust or, with respect to the California Tax Exempt Fund, by
a majority of the outstanding shares of the California Tax Exempt Fund, on
not less than 30 days' nor more than 60 days' written notice to the
Sub-adviser, or by the Sub-adviser on 90 days' written notice to the Trust.
PRINCIPAL UNDERWRITER
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned
subsidiary of SEI Investments, and the Trust are parties to a distribution
agreement (the "Distribution Agreement") with respect to shares of the Funds.
The Distributor receives no compensation of distribution of shares of the
Funds. The Distribution Agreement shall remain in effect for a period of two
years after the effective date of the Distribution Agreement and is renewable
annually. The Distribution Agreement may be terminated by the Distributor,
by a majority vote of the Trustees who are not interested persons and have no
financial interest in the Distribution Agreement or by a majority vote of the
outstanding securities of the Trust upon not more than 60 days' written
notice by either party or upon assignment by the Distributor.
TRANSFER AGENT
Pursuant to a Transfer Agency Agreement, SEI Investments Fund Management,
located at One Freedom Valley Drive, Oaks, Pennsylvania 19456 (the "Transfer
Agent") serves as transfer agent for the Funds. The Transfer Agent provides
information and services to the Funds' shareholders which include reporting
share ownership, sales, and dividend activity (and associated tax
consequences), responding to daily inquiries, and effecting the transfer of
the Funds' shares. It furnishes such office space and equipment, telephone
facilities, personnel, and informational literature distribution as is
necessary or appropriate in providing transfer agency information and
services.
CUSTODIAN AND FUND ACCOUNTANT
Pursuant to a Custodian Agreement, First Union National Bank serves as the
Custodian (the "Custodian") of the Funds' assets. Under the terms of the
Custodian Agreement, the Custodian holds and administers the securities and cash
in the Funds' portfolios.
INDEPENDENT ACCOUNTANS AND REPORTS TO SHAREHOLDERS
The Trust's independent accountants, KPMG LLP, audit and report on the annual
financial statements of the Funds and review the Funds' federal income tax
returns. KPMG 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 KPMG LLP is 725 South Figueroa Street, Los Angeles 90017.
22
<PAGE>
LEGAL COUNSEL
The validity of the shares of beneficial interest offered hereby will be
passed upon by Paul, Hastings, Janofsy & Walker LLP, 345 California Street,
Suite 2900, San Francisco, California 94104.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to: pursue the objective of
the Funds in relation to movements in the general level of interest rates;
invest money obtained from the sale of the Funds' shares; reinvest proceeds
from maturing portfolio securities; and meet redemptions of the Funds'
shares. Portfolio transactions may increase or decrease the yields of the
Funds depending upon management's ability correctly to time and execute them.
The Investment Manager or Sub-advisers, in effecting purchases and sales of
portfolio securities for the account of the Funds, seeks to obtain best price
and execution. Subject to the supervision of the Board of Trustees, the
Investment Manager or Sub-advisers generally selects broker-dealers for the
Funds 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 or Sub-adviser 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 or Sub-advisor 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 Funds are reached independently from those for
other accounts managed by the Investment Manager or Sub-adviser. Such other
accounts may also make investments in instruments or securities at the same
time as the Funds. On occasions when the Investment Manager or Sub-adviser
determines the purchase or sale of a security to be in the best interest of
the Funds as well as of other clients, the Investment Manager or Sub-adviser,
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 or Sub-adviser in the manner it considers to be the most
equitable under the circumstances and consistent with its fiduciary
obligations to the Funds and to its other participating clients. In some
cases this procedure may affect the size or price of the position obtainable
for the Funds.
23
<PAGE>
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the Funds' portfolio turnover
rates for reporting purposes are expected to be zero.
DISTRIBUTION AND TAXES
DISTRIBUTIONS
On each day that the Funds' net asset values per share are determined (each a
"Business Day"), the Funds' net investment incomes are 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 Funds 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 Funds calculate dividends based on daily net investment income. For this
purpose, the net investment income of the Funds consist of: (1) accrued
interest income, plus or minus amortized discount or premium, less (2)
accrued expenses allocated to the Funds. If the Funds realize 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 up to eight years.
It is not anticipated that the Funds will realize any long-term capital
gains. Expenses of the Trust are accrued daily. Should the net asset values
of the Funds 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 Funds' distributions.
FEDERAL INCOME TAXES
It is the policy of the Funds to qualify for taxation, and to elect to be
taxed, as "regulated investment companies" by meeting the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In order to so qualify, the Funds will distribute each year substantially all
of their investment company taxable income (if any), their net
exempt-interest income (if any), and their net capital gains (if any), and
will seek to meet certain other requirements. Such qualification relieves
the Funds of liability for federal income taxes to the extent the Funds'
earnings are distributed. By following this policy, the Funds expect to
eliminate or reduce to a nominal amount the federal income tax to which they
are subject.
In order to qualify as regulated investment companies, the Funds must, among
other things, annually (1) derive at least 90% of their gross income from
dividends, interest, payments with
24
<PAGE>
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 their business
of investing in stocks, securities or currencies, and (2) diversify holdings
so that at the end of each quarter of their taxable years (i) at least 50% of
the market value of the Funds' 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 Funds' 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 other regulated
investment companies) or of two or more issuers that the Funds control,
within the meaning of the Code, and that are engaged in the same, similar or
related trades or businesses. If the Funds qualify as regulated investment
companies, they will not be subject to federal income tax on the part of
their net investment income and net realized capital gains, if any, which
they distribute to shareholders, provided that the Funds meet certain minimum
distribution requirements. To comply with these requirements, the Funds must
distribute annually at least (1) 90% of "investment company taxable income"
(as that term is defined in the Code), and (2) 90% of the excess of (i) tax
exempt interest income over (ii) certain deductions attributable to that
income (with certain exceptions), for their taxable years. The Funds intend
to make sufficient distributions to shareholders to meet these requirements.
If either Fund fails to distribute in a calendar year (regardless of whether
it has a non-calendar taxable year) at least 98 percent of its (1) ordinary
income for such year; and (2) 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 undistributed ordinary income or capital
gain from the prior year, the Fund will be subject to a nondeductible 4%
excise tax on the undistributed amounts. The Funds intend generally to make
distributions sufficient to avoid imposition of this excise tax.
Any distributions declared by the Funds 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 Funds may adjust their
schedules 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 Funds do not expect to realize any significant amount of long-term
capital gain. However, any distributions by the Funds of long-term capital
gain will be taxable to the shareholders as long-term capital gain,
regardless of how long a shareholder has held Fund shares.
The Funds may engage in investment techniques that may alter the timing and
character of the Funds' incomes. The Funds may be restricted in their use of
these techniques by rules relating to qualifying as regulated investment
companies.
The Funds 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 an advance letter ruling 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 Funds intend to
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take the position that they are the owner of any securities with respect to
which they also hold a put option.
The Funds 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 shareholders of long-term
capital gains and any gains from the sale or disposition of shares of the
Funds 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 Funds 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 Funds and their 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 LLP 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).
CALIFORNIA INCOME TAX
The California Tax Exempt Fund intends to qualify to pay dividends to
shareholders that are exempt from California personal income tax ("California
exempt-interest dividends"). The Fund will qualify to pay California
exempt-interest dividends if (1) at the close of each quarter of the Fund's
taxable year, at least 50 percent of the value of the Fund's total assets
consists of obligations the interest on which would be exempt from California
personal income tax if the obligations were held by an individual
("California Tax Exempt Obligations"), and (2) the Fund continues to qualify
as a regulated investment company.
If the Fund qualifies to pay California exempt-interest dividends, dividends
distributed to shareholders will be considered California exempt-interest
dividends if they meet certain requirements. The Fund will notify its
shareholders of the amount of exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Fund may
not be entitled to exclude California exempt-interest dividends from income.
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Dividend distributions that do not qualify for treatment as California
exempt-interest dividends (including those dividend distributions to
shareholders taxable as long-term capital gains for federal income tax
purposes) will be taxable to shareholders at ordinary income tax rates for
California personal income tax purposes to the extent of the Fund's earnings
and profits.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of the Fund will not be deductible for California
personal income tax purposes if the Fund distributes California
exempt-interest dividends.
The foregoing is a general, abbreviated summary of certain of the provisions
of the California Revenue and Taxation Code presently in effect as they
directly govern the taxation of Shareholders subject to California personal
income tax. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning California tax matters.
Paul, Hastings, Janofsky & Walker LLP has expressed no opinion in respect
thereof.
SHARE PRICE CALCULATION
The Funds value 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 Funds' 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 a 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 Funds to take such action as it deems appropriate to
eliminate or reduce to the extent reasonably practicable such dilution or
unfair results. If the Funds' net asset values 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
Funds' net asset values 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.
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YIELD
If you would like to know the current seven-day yield of either of the Funds,
you may call 1-888-889-0799. The historical performance of the Funds 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 Funds 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.
TAX EXEMPT YIELD
A tax equivalent yield demonstrates the taxable yield necessary to produce an
after-tax yield equivalent to that of a fund that invests in tax exempt
obligations. The tax equivalent yield for the California Tax Exempt Fund is
computed by dividing that portion of the current yield (or effective yield)
of the California Tax Exempt Fund that is tax exempt by one minus a stated
income tax rate and adding the quotient to that portion (if any) of the yield
of the California Tax Exempt Fund that is not tax exempt.
DISTRIBUTION PLANS
The Trust has adopted a Distribution Plan (the "Plan") for the Class A and
Class S classes of the Funds in accordance with Rule 12b-1 under the 1940
Act, which regulates circumstances under which an investment company may
directly or indirectly bear expenses relating to the distribution of its
shares. In this regard, the Board of Trustees has determined that the Plan
is in the best interests of the shareholders. Continuance of the Plan must
be approved annually by a majority of the Trustees of the Trust and by a
majority of the Trustees who are not "interested persons" of the Trust as
that term is defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of the Plan or in any agreements related
thereto ("Qualified Trustees"). The Plan may not be amended to increase
materially the amount that may be spent thereunder without approval by a
majority of the outstanding shares of a Fund or class affected. All material
amendments to the Plan will require approval by a majority of the Trustees of
the Trust and of the Qualified Trustees.
The Plan adopted by Class A and Class S shareholders provides that the Trust
will pay the Distributor a fee of up to .50% of the average daily net assets
of a Fund's Class S shares that the Distributor can use to compensate
broker-dealers and service providers, including affiliates of the
Distributor, that provide distribution-related services to Class S
shareholders or to their customers who beneficially own Class A and Class S
shares.
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Payments may be made under the Class A and Class S Plans for distribution
services, including reviewing of purchase and redemption orders, assisting in
processing purchase, exchange and redemption requests from customers,
providing certain shareholder communications requested by the Distributor,
forwarding sales literature and advertisements provided by the Distributor,
and arranging for bank wires.
Except to the extent that the Investment Manager and/or Sub-adviser benefited
through increased fees from an increase in the net assets of the Trust which
may have resulted in part from the expenditures, no interested person of the
Trust nor any Trustee of the Trust who is not an interested person of the
Trust has or had a direct or indirect financial interest in the operation of
any of the distribution plans or related agreements.
Although banking laws and regulations prohibit banks from distributing shares
of open-end investment companies such as the Trust, according to an opinion
issued to the staff of the SEC by the Office of the Comptroller of the
Currency, financial institutions are not prohibited from acting in other
capacities for investment companies, such as providing shareholder services.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of financial institutions in connection with
providing shareholder services, the Trust may be required to alter materially
or discontinue its arrangements with such financial institutions.
SHAREHOLDER SERVICE AGREEMENTS
The Investment Manager has entered into a Shareholder Services Agreement with
the Trust. 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 Funds. As compensation
for the provision of such services, the Fund will pay the Investment Manager
a fee of up to 0.25% of the Funds' 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 Funds
under the Shareholder Services Agreement to the extent that the Participating
Organization performs shareholder servicing functions for the Funds with
respect to shares of the Funds 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 Funds.
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 Funds' 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 Funds 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 Funds 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 Funds for their
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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 Funds' Prospectuses
in conjunction with the service 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.
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 three series -- the Funds described in this Statement
of Additional Information and the CNI Charter Money Market Fund, which has
its own Statement of Additional Information. 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 (1) 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 (2) 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
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Trust, and except that where any provision of law, of the Agreement and
Declaration of Trust, or of the Bylaws permits or requires that (1) 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 (2) 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 Prospectuses 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.
PURCHASE AND REDEMPTION OF SHARES
The Funds' minimum initial investment is $100,000. 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 Funds 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 Funds and
valued as they are for purposes of computing the Funds' net asset values.
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: (1) $250,000,
or (2) one percent of the net asset value of the Funds 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 Funds 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 Funds 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 Funds with his/her certified
social security or tax identification number. The shareholder also
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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 Funds are required to
withhold taxes if a number is not delivered within seven days.
OTHER INFORMATION
The Prospectuses of the Funds 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 Prospectuses.
Certain portions of the Registration Statement have been omitted from the
Prospectuses 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, D.C.
Statements contained in the Prospectuses 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 Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
FINANCIAL STATEMENTS
There are no audited financial statements for the Funds because the Funds
have been in operation for less than one year.
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APPENDIX -- RATINGS OF INVESTMENT SECURITIES
I. 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
A 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.
II. 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
A 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 a SP-2 rating.
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III. 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.
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. 1
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